Review Notes: Life Insurance Underwriting

PURPOSE OF UNDERWRITING

Underwriting is the process used by an insurance company to determine if an applicant is

insurable and, if the applicant is insurable, how much to charge for premiums.
The underwriter will utilize several different types of information in determining the insurability
of the individual.
Material facts can affect an applicant being accepted or rejected.
One of the primary responsibilities of an underwriter is to protect the insurer against adverse
selection.
The underwriter classifies each proposed insured's risk and selects only those with an acceptable
risk per the insured's underwriting guidelines.

UNDERWRITING PROCESS

The underwriting process involves reviewing and evaluating the applicant's information and
establishing individual guidelines against the insurer's standards and guidelines for insurability
and premium rates. The larger the policy, the more comprehensive and diligent the underwriting
process.
The most common sources of underwriting information include:
The application
The medical report
Attending physician's Statement
The Medical Information Bureau
Special Questionnaires
Inspection Reports
Credit Reports
Application: The application is the starting point and primary source of information used by the
insurance company in the risk selection. Although applications differ from company to company,
they all have the following same components. Insurable interest must exist between the
policyowner and insured at the time when the application is made.
Insurable interest exists when the death of the insured would have a clear financial impact on
the policyowner.
Application
Part I of the Application
General Information - Age, DOB, Sex, Address, Marital Status, Occupation,
Details about the requested insurance coverage:
Type of policy
Amount of insurance
Name and relationship of the beneficiary
Other insurance the proposed insured owns
Other information personal information
Tobacco use
Hazardous hobby
Foreign travel
Aviation activity
Military service.
Part II of the Application
Medical Information - Health History
Part II focuses on the proposed insured's health and asks several questions about the
proposed insured's health history.
This medical section must be completed in its entirety for every application.
Depending on the proposed policy, 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 or provide a
blood test or urine specimen.
Part III of the Application
The Agent's Report (Statement) includes the agent's observations of the applicant.
Includes the applicant's financial condition, character, background, the purpose of
sale, and how long the agent has known the applicant.
Because the agent represents the insurance company's interests, the agent is
expected to complete this part of the application thoroughly and truthfully.
Policies below a certain face amount, such as $50,000 or even $100,000, will not require
additional medical information, other than provided by the application. However, they require a
medical report for further information.
Credit Reports: An applicant's credit history is sometimes used for underwriting and determines
the likelihood of making premium payments. The Fair Credit Reporting Act requires the
applicant to be notified in writing if a credit report will be used. The applicant must also be
notified if the premium is increased because of a credit rating.
Warranty: Warranties are statements that are guaranteed to be literally true. A warranty that is
not literally true in every detail, even if made in error, is sufficient to render a policy void.
Representations include statements made by the applicant that are substantially true to the best
of their knowledge but not warranted as exact in every detail.
Medical Report: A medical report is sometimes used for underwriting policies with higher face
amounts. If the medical section's information warrants further investigation into the applicant's
medical conditions, the underwriter may need an attending physician statement (APS).
 Inspection Reports: This report provides information about the applicant's character, lifestyle,
and financial stability. Due to their cost, inspection reports are usually only requested for more
extensive coverages. However, company rules vary as to the sizes of policies that require a report
by an outside agency. When an investigative consumer report is used in connection with an
insurance application, the applicant has the right to receive a copy of the report.
Companies can obtain inspection reports under The Fair Credit Reporting Act. The Fair Credit
Reporting Act of 1970 (FCRA) regulates how credit information is collected and used to protect
consumers' rights for whom an inspection or credit report has been requested. It established
procedures for the collection and disclosure of information obtained on consumers through
investigation and credit reports.
If an insurance company requests a credit report, the consumer must be notified in writing. This
report provides information about the applicant's character, lifestyle, and financial stability.
When an investigative consumer report is used in connection with an insurance application, the
applicant has the right to receive a copy of the report.
Medical Information Bureau (MIB): The MIB is a nonprofit trade organization that maintains
medical information about individuals.
Information from the MIB is used by life and health insurance companies to help avoid adverse
selection by applicants. It detects misrepresentations, helps identify fraudulent information, and
controls the cost of insurance. Information released from the Medical
Information Bureau about a proposed insured may be released to the proposed insured's
physician. Information received from the Medical Information Bureau (MIB) about a proposed
insured may be released to the proposed insured's physician. An insurance company will NOT
notify the MIB if an application is declined.
USA Patriot Act: The USA Patriot Act was enacted in 2001. It requires insurance companies to
establish formal anti-money laundering programs.
The purpose of the act is to detect and deter terrorism. A life insurance policy can be cash-
surrendered, which can be an attractive money-laundering vehicle because it allows criminals or
terrorists to put dirty money in and take clean money out in the form of an insurance company
check.
Special Questionnaires: are used for applicants involved in particular circumstances, such as
aviation, military service, or hazardous occupations or hobbies. The questionnaire provides
details on how much of the applicant's time is spent on these activities.
Fair Credit Reporting Act of 1970 (FCRA): Regulates how credit information is collected and used
to protect consumers' rights for whom an inspection or credit report has been requested.
Information regarding an individual's credit standing and general reputation is contained in a
consumer report. It established procedures for the collection and disclosure of information
obtained on consumers through investigation and credit reports. If an insurance company
requests a credit report, the consumer must be notified in writing.
The applicant has the right to receive a copy of the report when an investigative consumer
report is used in connection with an insurance application.

Privacy Notice

The Health Insurance Portability and Accountability Act is a privacy rule that provides federal
protections for an individual's health information. Furthermore, HIPAA gives patients an array of
rights concerning individually identifiable health information. When an agent submits an
 application that reveals personal information regarding the applicant, the agent is responsible
for providing the insurance applicant with privacy notices.
Producers must also secure an HIV consent form from the applicant in applicable situations and
communicate that blood tests may be required. In other words, even though the insurer requires
a blood test as part of its regular underwriting activity, it must still secure a signed consent form
which indicates to the applicant that any blood taken will be screened for HIV and that he or she
is providing permission for such testing to be completed.
Applicant Ratings: once all the information about a given applicant has been reviewed, the
underwriter seeks to classify the applicant's risk to the insurer. This evaluation is known as risk
classification.

CLASSIFICATIONS OF RISK

Once all the information about a given applicant has been reviewed, the underwriter will utilize
several different types of information in determining the insurability of the individual and the
risk that the applicant poses to the insurer. This evaluation is known as risk classification. The
following rating classification system is used to categorize the favorability of a given risk:
Preferred - Low Risk - Lower Premiums. Lower risks tend to have lower premiums. Some of
the following may result in a policy being issued with a preferred insurance premium:
The applicant does not smoke or drink
Good personal/family health history
Standard - Average Risk - No Extra Ratings or Restrictions. Standard terms and rates
Substandard - High Risk - Rated Up - Higher Premiums due to chronic conditions, insulin
diabetes, or heart disease
Declined - Not Insurable - Potential of Loss to Insurance Company is Too High. Terminal
illness, too many chronic conditions

FIELD UNDERWRITING PROCEDURES

Field underwriting is completed by the agent. Unlike the insurer, the agent has face-to-face
contact with the applicant, which can aid the insurer in risk selection. As field underwriters,
agents help reduce the chance of adverse selection, assure that the application is filled out
completely and correctly, collect the initial premium, and deliver the policy. Other duties
include:
Forwarding the application to the insurer in a timely manner
Seeking additional information about the applicant's medical history if requested
Notifying the insurer of any suspected misstatements in the application
Assuring the application is filled out completely and correctly
Collect the initial premium
In addition to that, agents have the responsibility and duty to solicit only profitable
business. Therefore, an agent's solicitation and prospecting efforts should focus on cases
that fall within the insurer's underwriting guidelines and represent profitable business to
the insurer.
Upon policy delivery, agents must deliver the life insurance buyer's guide and policy
summary to the applicant. A life insurance producer may also be required to obtain a
signature on a good health statement at the time of policy delivery.

Application Errors
 If an agent realizes that an applicant has made an error on an application, the agent must
correct the information and have the applicant initial the changes.
An incomplete application will be returned to the agent.
The agent can NEVER change the application without the customer present to initial the
changes.
Buyer's guide: provides general information about the types of life insurance policies available in
simple language that can be understood by the average person. (i.e., a general description of
whole life, a general description of term life, essential characteristics of variable life, etc.)
Policy Summary: provides specific information about the policy purchased, such as the premium
and benefits. For example, your grandmother calls you excited because she bought new health
insurance but can't tell you what it is. The policy summary allows you to quickly see what "health
insurance" specifically, she bought: Medicare Supplement, Major Medical, Critical Illness, Long-
term Care, etc.
Suitability Form Ensures that the customer is best suited for the policy they are purchasing.
Suitability forms help prevent the sale of unnecessary insurance. For example, a 75-year-old
customer living off of Social Security would not be suited for a single premium deferred annuity
because they would be giving up a large sum of cash that they could live on and possibly not
live long enough to collect on the annuity.
Signatures: The agent and the applicant are required to sign the application. If the applicant is
someone other than the proposed insured, except for a minor child, the proposed insured must
also sign the application. Having a policy owner (applicant) that is different from the insured
(parent and minor child) is considered third party ownership in most states. Once a minor
reaches the age of 15, he is eligible to contract for an insurance policy.
If an agent fails to deliver a fully completed and accurate application, the insurance company
will return the agent's application.
When an applicant makes a mistake in the information given to an agent in completing the
application, the applicant can have the agent correct the information, but the applicant must
initial the correction. However, if the company discovers the mistake before the applicant, it
usually returns the agent's application. The agent then corrects the mistake with the applicant
and has the applicant initial the change.
An incomplete application will be returned to the producer, and a new one will have to be filled
out.

Premiums and Receipts

Agents should make every effort to collect the initial premium with the application.
However, if the premium is not collected with the application, the policy will not become valid
until the initial premium is collected.
The agent issues the applicant a premium receipt upon collecting the initial premium.
The only time a customer will receive a receipt is if they pay their initial premium at the time of
application. No receipt will be given at any other time.
There are two types of premium receipts that determine when coverage will begin. These are
conditional receipts and binding receipts.
Conditional Receipt: The producer issues a conditional receipt to the applicant when the
application and premium are collected. The conditional receipt denotes that coverage will
be effective once certain conditions are met. If the insurer accepts the coverage as applied
 for, the coverage will take effect from the application or medical exam date, whichever is
later.
Binding Receipt: The binding receipt, or the temporary insurance agreement, provides
coverage from the date of the application regardless of whether the applicant is insurable.
Coverage usually lasts for 30 to 60 days, or until the insurer accepts or declines the
coverage. Binding receipts are rarely used in life insurance and are primarily used in auto
and homeowners' insurance. Under a binding receipt, coverage is guaranteed until the
insurer formally rejects the application. This may also be described as the insurer is bound
to coverage until the application is formally rejected. Even if the proposed insured is
ultimately found to be uninsurable, coverage is still guaranteed until rejection of the
application.

Effective Date of Coverage

As explained under conditional receipt, coverage is not effective without the collection of the
initial premium, approval of the application, and policy issuance and delivery. If the initial
premium does not accompany the application, the premium must be collected by the agent. In
some cases, the insurer requires the agent to collect a good health statement from the insured at
the delivery time. If the initial premium is not submitted with the application, the policy
effective date is established by the insurer. In this case, it could be the date the policy is issued.
Generally, for a policy to be in effect:
The insurer must issue the policy;
The insured must submit the initial premiums; and
If applicable, the insured must sign a statement of continued good health.
The effective date is important for two reasons: it identifies when the coverage is effective and
establishes the date by which future annual premiums must be paid.
Backdating: is the process of predating the application a certain number of months to achieve a
lower premium. A younger age at the time of application results in a lower premium. A
backdated application results in a backdated policy effective date, if approved by the insurer.
Applications usually can only be backdated for up to 6 months. This process is also known as
"saving age." In addition, policyowners are required to pay all back-due premiums, and the next
premium is due at the backdated anniversary date.

Policy Issue

Policy issue happens when the insurer "approves" the application; they are "issuing the policy."
The insurance issued contract is sent to the sales agent for delivery to the applicant. The policy
usually is not sent to the policyowner because the sales agent should explain it to the
policyowner.
Technically a policy could be ISSUED and not delivered for days or weeks later.
Constructive delivery: policy delivery may be accomplished without physically delivering the
policy into the policyowner's possession.
Constructive policy occurs 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. If the
company instructs the agent not to deliver the policy unless the applicant is in good health,
there is no constructive delivery.
The Statement of good health: verifies that the insured has not become ill, injured, or disabled
during the policy approval process (time between submitting application and delivery of the
policy), or did not submit the initial premium with the application. It is used when the applicant
did not submit the initial premium with the application in such cases.
Common company practice requires that, before leaving the policy, the agent must collect the
premium and obtain from the insured a signed statement attesting to the insured's continued
good health. Statements of good health are also used when reinstating a policy.
Personal delivery of the policy is a good practice as it allows the producer to explain the
coverage to the insured (such as the riders, provisions, and options). Personal delivery also builds
trust and reinforces the need for the coverage. All of the following acts can be considered means
of delivery: mailing policy to the agent, mailing the policy to the applicant, and the agent
personally delivering policy.