Life Insurance Underwriting and Policy Issue

 PURPOSE OF UNDERWRITING

Underwriting is the process used by an insurance company to determine whether or not an applicant is
insurable and if so, how much to charge for premiums. The underwriter will utilize several different
types of information in determining the insurability of the individual. This is called risk classification.
Material facts can affect an applicant being accepted or rejected.

 UNDERWRITING PROCESS

Application: The application is the starting point and basic 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.

Application

Part I – General Information – Age, DOB, Sex, Address, Marital Status, Occupation

Part II – Medical Information – Health History

Part III – Agent’s Report – Agent’s personal observations of the applicant.

Credit Report: An applicant’s credit history is sometimes used for underwriting and to determine the
likelihood of making premium payments. The Fair Credit Reporting Act requires the applicant 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.

Representation: Statements made by applicants that are substantially true to the best of their
knowledge, but not warrantied as exact in every detail.

Medical Report: A medical report is sometimes used for underwriting policies with higher face amounts.
If the information in the medical section 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. Inspection reports are usually only requested for larger coverages because they add
expense to the underwriting process.
Medical Information Bureau (MIB): The MIB is a nonprofit trade organization which maintains medical
information about individuals. Information from the MIB is used by life and health insurers. This helps
insurance companies from adverse selection by applicants, as 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.

Special Questionnaires: are used for applicants involved in special 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 in these activities.

Fair Credit Reporting Act: Regulates the way credit information is collected and used. 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 producer must provide a privacy notice to an applicant if personal information about
that applicant is disclosed and is passed along to the insurer or its affiliates.
• 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.

 CLASSIFICATIONS OF RISK

After all necessary information is collected on an applicant the underwriter will classify the applicant
based on the degree of risk assumed.

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:
• Applicant is nonsmoker and/or nondrinker
• Good personal/family health history

 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
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 statement of
good health at the time of policy delivery.

Buyer’s Guide: provides general information about the types of life insurance policies available, in
language that can be understood by the average person.

Policy Summary: provides specific information about the policy purchased, such as the premium and
benefits.

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. This 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.

Premiums and Receipts

Agents should make every effort to collect the initial premium with the application.

The agent issues the applicant a premium receipt upon collecting the initial premium.

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 date of the application or medical exam, 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.

Effective Date of Coverage

As explained under conditional receipt, coverage is not effective without 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 statement of good health from the insured at the time of delivery. If the
initial premium is not submitted with the application, the policy effective date is established by insurer.
In this case, it could be the date of policy issuance, or the date the policy is delivered to the applicant,
premium collected, and statement of continued good health signed.
Backdating: is the process of predating the application a certain number of months to achieve a lower
premium. A lower age 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 up to 6 months.
This process is also known as “saves age”.

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 producer and a new one will have to be filled out.

 POLICY ISSUE AND 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.

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). Personally delivering 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 applicant; and the agent personally delivering policy.