Underwriting
Another term for risk selection; the process of reviewing the many characteristics that make up the risk profile of an applicant and, if they are insurable, at what rate.
What are the two basic questions underwriters seek to answer?
1. Is the applicant insurable?
2. If the applicant and insured are two different people, does and insurable interest exist between them?
When must an applicant show that an insurable interest exists?
Only at the inception of the life insurance policy; does not have to exist at the time that the proceeds are paid.
What are the two most notable factors in determining the number of sources checked when underwriting a policy?
1. The size of the requested policy
2. The risk profile developed after the initial review of the application
(The larger the policy, the more comprehensive and diligent the underwriting research)
What are the seven most common sources of underwriting information?
1. the application
2. the medical report
3. an attending physician's statement
4. the Medical Information Bureau
5. special questionnaires
6. inspection reports
7. credit reports
What is the application and what are the three basic parts to a typical application?
It is a basic sort of insurability information; general, medical and agent's reports
Describe, generally, the three parts of a life insurance application.
1. General- name, age, address, DOB, income, marital status, etc. Also, details about the requested insurance such as the type of policy, amount, beneficiaries, other insurance.
2. Medical- focuses on the insured's health and the health of their family. T
When is a Medical Report required, what else might be required, and who reviews it?
1. Any time a person wants a policy that exceeds the non-medical limit.
2. Larger policies and older applicants may require a medical exam and/or attending physician's statement (APS) or a medical exam completed by a qualified person
3. Reviewed by the co
What is the Medical Information Bureau and what is its main purpose?
A centralized organization that was established by insurance agencies to aid in the underwriting process. Member companies report to the MIB any applicant ailment or impairment and it is given a code so that information is available to other member compan
What are the four basic requirements of the MIB member companies?
1. Applicants must be informed, in writing, that the info will be reported to the MIB
2. Applicants must be advised that that info will be shared if they apply to another MIB company
3. Applicants must sign authorization forms to that end
4. MIB will disc
What are special questionnaires, when may they be required, and what is the most common type?
Further information required for underwriting related to aviation or avocation, foreign residence, finances, military service, or occupation. It is needed to determine whether or not the insurance risk is acceptable. The most common type is the aviation q
When are inspection reports obtained and what is their purpose?
Obtained by insurance companies on applicants who apply for large amounts of life insurance to provide a picture of an applicant's general character and reputation, mode of living, finances and any exposure to abnormal hazards.
Why might an applicant's credit report be pulled before a policy is issued?
Applicants with a poor credit history may be refused because an insurance company can lose money on a policy that is quickly lapsed because the insurer's expenses to acquire the policy cannot be recovered in a short period of time.
What is the purpose of the Fair Credit Reporting Act?
To protect the rights of consumers for whom an inspection report or credit report has been requested. It seeks to ensure fairness with confidentiality, accuracy, and disclosure.
What are the five most important requirements of the FCRA pertaining to insurers? (Briefly)
1. Applicants must be notified that the report has been requested
2. The consumer must be told who was contacted in the last six months for the report
3. If an app is rejected, the company must supply the name of the consumer reporting agency
4. If reques
What are the three risk classifications of insurance applicants?
Preferred, Standard, and Substandard risk
Preferred Risk
This is the classification given to exceptionally good risks and generally at a lower rate than standard risk rates. Non-smokers with weight within an ideal range, with favorable cholesterol levels are given this rating.
Standard Risk
Term used for individuals who fit the insurer's guidelines for policy issue without special restrictions or additional rating.
Field underwriter
Agent who initiates the underwriting process and is responsible for proper solicitation, completing the app, getting the appropriate signatures, collecting the initial premium and issuing a receipt.
Substandard Risk
This risk classification is given to individuals who fall below the standard risk guidelines and can be for a number of reasons such as poor health, dangerous occupations, attributes or habits that could be hazardous and these policies could be rejected o
What are the basics of proper solicitation?
Agent's efforts should focus on people who fall within the insurer's guidelines and represent profitable business.
Agents also have a responsibility to the insurance-buying public that all sales solicitations should be open and above-board, with the agent
Deceptive Sale
Any sale resulting from anything that gives the wrong impression about any aspect of a policy, or that does not provide complete disclosure, or that includes misleading or inconclusive product comparisons- even if it was unintentional.
What documents are insurance agents in Florida required to give to applicants?
Life Insurance Buyers Guide and Policy Summary
Life Insurance Buyers Guide
Generic guide that explains life insurance in a way that average consumers can understand and does not address any specific product.
Policy Summary
Addresses the specific insurance product; identifies the agent, the insurer, the policy, each rider and includes information about premiums, benefits, interest rates, etc
Are the statements on the application considered representations or warranties? What is the difference?
Representations, as they must be true only to the extent that they are material to the risk and are true to the best of the applicant's knowledge. Warranties are considered to be literally true. If a warranty is not literally true in every detail, even if
What age does a child need to be to sign a life insurance application?
15
Who must sign each life insurance application?
The proposed insured, the policyowner (if different than the insured), and the agent.
What is the general rule regarding changes to an application?
No alterations of any written application can be made by any person other than the applicant without the applicant's written permission.
What is a consideration in the case of an insurance contract?
First premium payment plus the application
Premium Receipt
Receipt given when applicants pay a premium deposit that determines exactly when and under what conditions and applicant's coverage begins.
What are the two major types of receipts?
Conditional receipts and binding receipts (sometimes called temporary insurance agreements)
What is the most common type of premium receipt?
Conditional receipt
What are the two types of conditional receipts?
Insurability Receipt and Approval Receipt
Insurability Receipt
Coverage is effective as soon as the applicant pays the initial premium, on the condition that they prove insurable. Coverage can be retroactively applied in cases such as if the insured dies, as long as insurability was proven.
Approval Receipt
Rarely used and more restrictive, not well-liked by courts. Coverage is effective only upon approval, before the policy is delivered.
What happens with conditional receipts if the applicant is found to be insurable, but only on a substandard or rated basis?
1. No retroactive protection is provided because the applicant did not qualify for the policy applied for
2. The insurer will counter with an offer for another policy at a different rate
3. If an applicant is found to be substandard and dies prior to acce
What happens when a binding receipt is issued?
Coverage is guaranteed, even if the person is found to be uninsurable, until the application is formally rejected. Since this puts the company at considerable risk, only the most experienced agents will issue these.
What are the general provisions of a binding receipt?
1. The applicant is covered at the time of application (or on the date of the later exam, if required) for the amount applied for. That is in place until the application is accepted, rejected, or another policy is offered
2. If an exam is required, covera
Why is the policy effective date important?
It identifies when the coverage is effective and also the date by which future annual payments must be paid.
When is a new policy "truly" effective?
When the policy has been delivered to the applicant, the premium paid and a Statement of Good Health is obtained.
Why would someone want to backdate a policy?
Slightly lower premiums can result from being younger when the policy began, resulting in a lifetime of lower premiums
What three criterion must be met before a policy can be backdated?
1. The insurer must allow backdating
2. Typically the company will impose a limit on how far back a policy can be backdated
3. Policyowner must pay all back-due premiums and the next premium is due on the backdated anniversary.
What does preliminary (or interim) term insurance accomplish?
Provides immediate protection for an applicant who (for whatever reason) wants to defer the issue date of their policy (and the payment of the full premium).
Constructive Delivery
Satisfies legal interpretation; when the insurance company intentionally relinquishes all control over the policy by turning it over to someone acting on their behalf, like the agent. It can also be met by mailing it to the agent even if they don't delive
Inspection Receipt
If a policy is left with an applicant for inspection, the inspection receipt indicates that the policy isn't in force during the inspection period, nor will it be until the initial premium has been paid.
What is a Statement of Continued Good Health and when might it be needed?
It is a signed statement assuring the company that the policyowner represents the same risk to the company as when the application was first signed. It is needed when the initial premium will not be paid until the agent delivers the policy. If that happen
Traditional Net Cost Method
A method of comparing costs of similar policies that does not take into account the time value of money. Premiums over a time period are totaled, dividends and cash value at the end are subtracted, and divided by the number of years in the comparison. Thi
Why is the Traditional Net Cost Method falling out of favor?
It ignores the time value of money. Money placed in an investment vehicle (like insurance) earns interest. Different companies apply different interest rates to policies and, by ignoring it, this method is not as effective at projecting the real cost of a
Interest Adjusted Net Cost Method
It is calculated by a method in which premiums over a time period are totaled, dividends and cash value at the end are subtracted, and divided by the number of years in the comparison and the resulting number is the net cost per year. This method adds in
Why aren't policies usually sent directly to the policyowner?
As an important legal document, it should be explained to the policyowner by the sales agent.