Chapter 5: Life Insurance Underwriting & Policy Issue

Requires that an individual have a valid concern for the continuation of the life or well-being of the person insured. Without insurable interest, an insurance contract is not legally enforceable and would be considered a wagering contract. Insurable interest only needs to exist at the time of the application (the inception of the contract). A person is considered to have unlimited insurable interest in on themselves.

a form supplied by the insurance company, usually filled in by the agent and medical examiner (if applicable) on the basis of information received from the applicant. It is signed by the applicant and is part of the insurance policy if it is issued. It gives information to the home office underwriting department, so it may consider whether an insurance policy will be issued and, if so, in what classification and at what premium rate.

asks general questions about the proposed insured, including name, age, address, birth date, sex, income, marital status, and occupation. Details about the requested insurance coverage are also included in Part 1 such as:

• Type of policy

• Amount of insurance

• Name and relationship of the beneficiary

• Other insurance the proposed insured owns

• Additional insurance applications the insured has pending

• Other information sought may indicate possible exposure to a hazardous hobby, foreign travel, aviation activity, or military service

• Tobacco use

focuses on the proposed insured’s health and asks a number of questions about the health history, not only of the proposed insured, but of the proposed insured’s family, too. The medical section must be completed in its entirety for every application. Depending on the proposed policy face amount, this section may or may not be all that is required in the way of medical information. The individual to be insured may be required to take a medical exam and/or provide a blood test or urine specimen. Physical Exams, if requested by the insurer, are preformed at the expense of the insurer.

is where the agent reports personal observations about the proposed insured. Because the agent represents the interests of the insurance company, the agent is expected to complete this part of the application fully and truthfully. In part III, the agent provides additional information about the applicant’s financial condition and character, the background and purpose of the sale, and how long the agent has known the applicant. The agent’s report also usually asks if the proposed insurance will replace an existing policy. If the answer is yes most states demand that certain procedures be followed to protect the rights of consumers when policy replacement is involved.

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

a report ordered by the insurance company and completed by a physician, hospital, or medical facility who has treated, or who is currently treating, a person seeking insurance.
An APS is one of the most frequently ordered additional sources of medical background information and can be for a specific ailment (diabetes, broken leg, etc.) or for a general family doctor.

reports of an investigator providing facts required for a proper underwriting decision on applications for new insurance and reinstatements

summary of an insurance applicant’s credit history, made by an independent organization that has investigated the applicant’s credit standing

federal law requiring an individual to be informed if she is being investigated by an inspection company. the law also outlines the sharing and impact of such information and requires individuals to be notified prior to being investigated

the grouping of different risks according to their estimated or likely impact, likelihood of occurrence, countermeasures required, etc.

a risk whose physical condition, occupation, mode of living, and other characteristics indicate a prospect for longevity for unimpaired lives of the same age

a person who, according to a company’s underwriting standards, is entitled to insurance protection without extra rating or special restrictions

A person who is considered an under average or impaired insurance risk because of physical condition, family or personal history of disease, occupation, residence in unhealthy climate, or dangerous habits.

an informational consumer guide books that explain insurance policies and insurance concepts; in many states they are required to be given to applicants when certain types of coverages are being considered. Buyer’s Guides are often used with life insurance, long-term care insurance, and annuities

a summary of the 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

given to the policy owners when they pay a premium at time of application. Such receipts bind the insurance company if the risk is approved as applied for, subject to any other conditions stated on the receipt

given by a company upon an applicant’s first premium payment. The policy, if approved, becomes effective from the date of the receipt

the practice of making a policy effective at an earlier date than the present. This is typically done to lower insurance premiums by ignoring a recent birthday. In most states agents are allowed to back-date up to 6-months, provided the insurer allows this practice.

was enacted in 2001 and requires insurance companies to establish formal anti-money laundering programs. the purpose of the USA Patriot Act is to detect and deter terrorism.

statement an applicant makes as being substantially true to the best of the applicant’s knowledge and belief, but which are not warranted to be exact in every detail. Representations must be true only to the extent that they are material to the risk.

statements that are guaranteed to be correct. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void.

accomplished technically if the insurance company intentionally relinquishes all control over the policy and turns it over to someone acting for the policyowner, including the company’s own agent. Mailing the policy to the agent for unconditional delivery to the policyowner also constitutes constructive delivery, even if the agent never personally delivers the policy.

another term for risk selection, is the process of reviewing the many characteristics that make up the risk profile of an applicant to determine if the applicant is insurable and, if so, at standard or substandard rates. There are 2 basic questions underwriters seek to answer about an applicant:

• is the applicant insurable?

• if the applicant and insured are two different people, does an insurable risk exist between the two of them?

Under the traditional net cost method, projected premiums are totaled for a specific time period, such as 20 years. Projected policy dividends (if any) and the cash value at the end of the period are subtracted from the total. The resulting value divided by the number of years in the comparison yields the net cost per $1,000 per year. This method is no longer permitted in many states because of one significant flaw: this method ignores the time value of money. Money places in an investment vehicle (like insurance) earns interest. Each insurance company applies its own interest rate to their policies. By ignoring this fact, traditional net cost comparison falls short in projecting the real cost of a policy.

today, the interest adjusted net cost method is the most common method for comparing policy costs. It is calculated similarly to the traditional net cost method, but adds interest to the formula. The interest factor is based on each company's projected interest rate. In this way, the cost estimates more accurately reflect the actual cost of a policy.