LAH Chapter 6 Keywords: Life Insurance Underwriting and Policy Issue

Adverse Selection

the tendency of a disproportionate number of poor risks to seek or buy insurance or maintain existing insurance in force (i.e., the selection against the insurance company). Sound underwriting reduces adverse selection.

Age Change

the date halfway between birthdays when the applicant's age changes to the next higher age. With some insurers, the age is based upon the applicant's age at his nearest birthday. In others, it is based upon the age of his last birthday.

Applicant

the person completing the application to the insurance company for the insurance policy. In most cases, the applicant is also the proposed insured, but this is not always the case.

Application

the Statement of information given when a person applies for life, health, or disability insurance. The insurance company's underwriter uses this information as a basis in determining whether the applicant qualifies for acceptance under the company's guidelines. Applications are attached to and made a part of all individual contracts.

Attending Physician Statement (APS)

these are used when the application or medical examiner's report reveals conditions or situations, past or present, about which more information is desired. Because of Physician/Patient confidentiality, the applicant must sign an authorization, which allows the physician to release information to the insurance company underwriter.

Backdating

the practice of making the effective date of a policy earlier than the application date. Backdating is used to make the issue age lower than an applicant's real age in order to get a lower premium. State laws usually limit the time to which policies can be backdated to six months. Backdating is not allowed in variable contracts due to the nature of the investment.

Binding Receipt (Unconditional Receipt)

It is one of the types of receipts given by an insurance company upon the completion of an insurance application if the initial premium is collected with the application. Insurance becomes effective on the receipt date and continues for a specified period of time or until the insurer declines the application.

Buyer's Guide

a pamphlet that describes and compares various forms of life or health insurance. This guide must be provided to a consumer by the producer when the latter is attempting to solicit insurance. This guide makes information available to the consumer that helps them make an informed decision when purchasing insurance coverage.

Conditional Receipt

a form customarily required to be signed by the agent and given to the prospective owner at the time a new application is completed. The issuing of a receipt is subject to individual company rules. Most require that the agent collect an initial premium and, in turn, grant some level of limited coverage under special conditions before issuing the policy. Without a valid conditional receipt, no coverage is in force until the policy is issued, delivered, and accepted with the initial premium paid.

Consumer Report (Investigative Consumer Report)

a detailed background investigation that may include an interview with coworkers, friends, and neighbors about an applicant's character, reputation, lifestyle, etc. Insurers can conduct a consumer report to obtain additional information as long there is no invasion of privacy present. A common type of consumer report involves a credit report.

Credit Report

a summary of an insurance applicant's credit history (credit score, debt levels, repayment history, and assumed creditworthiness, etc.), made by an independent organization that has investigated the applicant's credit standing. Credit reports are typically obtained from one of the three major credit bureaus (Experian, Equifax, and TransUnion).

Declined Risk

describes an individual whose application for coverage was rejected by an insurance company.

Disclosure Form

a comparison form required by various state regulatory agencies to be given to every policyowner when replacing an existing policy with another.

Evidence of Insurability

describes a statement or proof of a person's health history and current health status that qualifies that person for coverage.

Fair Credit Reporting Act

a federal law passed in 1970 that provides an insurer with the right to receive additional information with regard to applicants for insurance coverage. This law permits an insurer to conduct a consumer report on applicants and proposed insureds. An applicant for insurance must be informed of the purpose of the report. Suppose coverage is declined due to information in the report. In that case, the insurer must provide the name and address of the reporting agency so that the applicant can secure a copy of the information in the report.

Field underwriter

the agent or producer completing the applicant's application for insurance.

Free-look Period

All life insurance policies must include at least a ten-day free-look period in a life insurance contract. This period begins when the producer delivers the insurance policy. If the policy owner decides to return the contract to the insurer during this period, they will receive a full premium refund. Mail order or direct response insurers must include a free-look period of at least thirty days.

Inspection Report

a report that contains general information regarding the health, habits, finances, and reputation of an applicant. This report is developed by a firm that specializes in rendering this type of service.

Insurable Interest

describes the financial or emotional relationship between two or more parties justifying one owning a life insurance policy on the other. People are said to have an unlimited insurable interest in their own life. Insurable interest may exist in another person's life if there is a chance of a financial or emotional loss at that person's death. The insurable interest must exist at the time of policy issue.

Medical Information Bureau

a service organization that collects medical data on life and health insurance applicants for member insurance companies.

Policy Summary

summarizes the basic terms of an insurance policy, including the conditions, coverage limitations, and premiums. Policy summaries are often used with life insurance, long-term care insurance, and annuities.

Preferred Risk

describes an applicant who represents the likelihood of risk lower than that of the standard applicant, typically due to better than average physical condition, occupation, mode of living, and other characteristics compared to other applicants of the same age.

Proposed Insured

the person whose life is requesting to be insured. Typically, but not always, this is also the applicant.

Rated Policy (Rating Up)

the basis for an additional charge to the standard premium because the person insured is classified as a higher -than-average risk. The above standard rates usually result from impaired health or hazardous occupations.

Replacement

a legal activity where a producer convinces a prospective client to lapse or surrender a life or health policy and purchase a new one. Producers must provide a "Notice Regarding Replacement" to the consumer when this activity may occur. The producer must also notify the insurer that a replacement is occurring as well.

Representations

Most State laws specify that the applicant's statements on the application are considered representations and not warranties. A representation need only be substantially accurate to the best of the applicant's knowledge. Generally, a representation is considered to be fraudulent if it relates to a situation that would be material to the risk and that the applicant made with fraudulent intent.

Risk Classification

describes the underwriting category into which risk is placed depending upon the applicant's susceptibility to injury, illness, or death.

Special Class

describes an applicant who cannot qualify for a standard policy, but may secure one with a rider waiving the payment for a loss involving certain existing health impairments. They may be required to pay a higher premium or to accept a policy of a type other than the one for which he has applied.

Standard Risk

describes a person who, according to a company's underwriting standards, is considered an average risk and insurable at standard rates. High-risk or low-risk candidates may qualify for increased or discounted rates based on their deviation from the standard.

Substandard Risk (Impaired Risk)

also known as impaired risk, describes an applicant whose physical condition does not meet the usual minimum standards. If the substandard classification is due to adverse health, the application may be declined or written with a "rated-up" premium. An applicant may be in excellent health but considered substandard due to their activities, hobbies, or avocations (i.e., scuba diving, skydiving, etc.).

Underwriter

a person who identifies, examines, and classifies the degree of risk represented by a proposed insured in order to determine whether or not coverage should be provided and, if so, at what rate.

Underwriting

the analysis of information obtained from various sources pertaining to an applicant for insurance and the determination of whether or not the insurance should be issued as requested, offered at a higher premium, or declined.

Warranties

Most State laws specify that the applicant's statements on the application are considered representations and not warranties. A warranty must be absolutely and literally true. A breach of warranty may be sufficient to void the policy whether or not the warranty is material and whether or not such breach of warranty had contributed to the loss.