APPLICATION AND UNDERWRITING (Chapter 9) Flashcards
1
Q
REVIEW
What’s the most common arrangement for key person insurance?
A
Split-Dollar Arrangement
- The corporation could own the death benefit up to the original face amount, while the employee owns the policy’s cash value and any death benefit in excess of the original face amount.
[Ref. 8.3.1]
2
Q
REVIEW
There are 5 steps with the criss-cross insurance agreement, Explain them.
A
Jack and Alfred each own 50% of the 200 shares of Jackal Inc., a frozen dessert company.
- They implemented a buy-sell agreement funded with criss-cross insurance. Jack died shortly thereafter. The overall process would look like this:
- 1. Jack and Alfred pay the premiums for life insurance on each other.
- 2. Jack dies, and his 100 shares transfer to his estate.
- 3. The insurance company pays a tax-free death benefit to Alfred.
- 4. Alfred pays Jack’s estate for his 100 shares.
- 5. Jack’s estate transfers the 100 shares to Alfred, who now owns all 200 shares,
or 100% of the company.
[Explain this to the prospective clients using your own words and examples]
[Ref. 8.4.3]
3
Q
REVIEW
There are 7 steps with the corporate-owned cross-purchase agreement Explain them.
A
Suppose Jack and Alfred’s cross-purchase agreement is instead funded by insurance owned by Jackal Inc. When Jack died shortly thereafter, the overall process would look like this:
- 1. Jackal Inc. pays the premiums for insurance on both Jack and Alfred.
- 2. Jack dies, and his 100 shares transfer to his estate.
- 3. The insurance company pays the tax-free death benefit to Jackal Inc., which is credited to its CDA.
- 4. Alfred pays Jack’s estate for his 100 shares with a promissory note.
- 5. Jack’s estate transfers the 100 shares to Alfred, who now owns all 200 shares, or 100% of Jackal Inc.
- 6. Alfred instructs Jackal Inc. to pay him a tax-free capital dividend.
- 7. Alfred uses these funds to pay off the promissory note.
[Explain this to the prospective clients using your own words and examples]
[Ref. 8.4.4.3]
4
Q
REVIEW
There are 5 steps in Funding share-redemption buy-sell agreement Explain them.
A
- 1. Jackal Inc. pays the premiums for insurance on both Jack and Alfred.
- 2. Jack dies, and his shares transfer to his estate.
- 3. The insurance company pays the tax-free death benefit to Jackal Inc., which
is credited to its CDA. - 4. Jackal Inc. uses the funds to redeem the shares from Jack’s estate, cancelling
the said shares, reducing the number of shares outstanding to 100. - 5. Alfred still owns the remaining 100 shares, which represents 100% of the company.
[Explain this to the prospective clients using your own words and examples]
[Ref. 8.4.4.3]
5
Q
What are the differences between Guaranteed & Adjustable Whole Life Policies?
A
- Guaranteed whole life insurance policy offers a death benefit and premiums that are guaranteed not to change over time.
- Adjustable Whole Life Policy offers a death benefit and premiums that the
insurance company may adjust periodically to reflect its actual experience.
6
Q
REVIEW
What are the Non-forfeiture options in a UL policy?
Name some
A
- Surrendering the policy
- Policy withdrawals (partial surrender)
- Premium offsets
- Policy loans
- Collateral for third-party loans
- Leveraging
- Distribution upon death
7
Q
REVIEW
In a whole life policy, what are the 5 dividend payment options for Participating Policies?
A
- Cash
- Premium Reduction
- Accumulation
- Paid-Up Additions (PUAs)
- Term Insurance
8
Q
What are the FOUR non-forfeiture Benefits in a Whole Life Policy?
A
(Easiest way to remember is “CARE”)
- C - Cash Surrender Value
- A - Automatic Premium Loan
- R - Reduced Paid-up Insurance
- E - Extended Term insurance
9
Q
REVIEW
Explain Riders & Supplementary Benefits
A
- Riders provide additional benefits upon death, and supplementary benefits provide benefits before the death of the life insured.
- They are the “extras” that can be added to customize a policy to better address a policyholder’s unique needs.
10
Q
Chapter 9 - Application & Underwriting
Simplify Application & Underwriting
A
Applying for a policy, with insurance company assessing the risks through underwriting
11
Q
What is the agent’s role in the application & underwriting process?
A
To help collect the information that the insurance company needs to perform
its risk assessment.
12
Q
In the process of completing an application, there are 4 steps the agent must take, what are they?
A
- Ensure that the information recorded on the application is complete and accurate;
- Ensure that the applicant understands the consequences of providing incomplete or false information;
- Confirm the identities of the applicant and the life insured (if different) by examining their identification (e.g., driver’s licence, passport);
- Witness their signatures on the application.
13
Q
Explain Underwriting
A
The process that the insurance company uses to assess the risk presented by the life insured.
14
Q
TRUE OR FALSE?
After the life insurance company issues the policy, the agent must deliver it to the insurance company.
A
FALSE
After the life insurance company issues the policy, the agent must deliver it to the applicant.
- This is considered to be a continuation of the underwriting process, because the agent must ensure that the medical, personal or financial situation of the applicant (and the life insured, if different) has not changed since the application date.
15
Q
Explain the application process
A
- The agent assists the applicant either by providing guidance or by actually asking the questions verbally and then recording the responses.
- Depending on the insurance company and the type of policy being applied for, the application can range from 5 to 50 pages or even more.
16
Q
There are about 7 details will define the terms of the policy during the application. What are they?
A
- Applicant/policyholder
- Life insured
- Beneficiary
- Type of policy
- Riders and supplementary benefits
- Premium option
- Dividend options
[Ref. 9.2.1]
17
Q
One of the first things the underwriter will consider is whether or not the applicant has the financial means to afford policy premiums. To this end, the application may ask for details (5) such as the applicant’s….
A
- Occupation (or prior occupation if retired);
- Employer;
- Employment income;
- Additional sources of income;
- Net worth.
- (If the applicant is dependent on someone else for financial support (e.g., a spouse), the underwriter may enquire about the financial means of the supporting person.)
[Ref. 9.2.2.1]
18
Q
TRUE OR FALSE?
If the applicant is not the life insured, the applicant will be asked to specify his relationship to the life insured.
A
TRUE
19
Q
It is typically accepted that a person has an insurable interest in his own life, as well as in the life of (5)…
A
- Child or grandchild;
- Spouse;
- dependents;
- Employee;
- Any person who has a pecuniary interest
20
Q
TRUE OR FALSE?
If an insurable interest does not exist at the time of policy issue, the contract can still be issued as long as the applicant gets approved.
A
FALSE
If an insurable interest does not exist at the time of policy issue, the contract is generally considered to be void.
However, the insurable interest only has to exist at the time of policy issue.
21
Q
TRUE OR FALSE?
The purpose of life insurance is to protect the policyholder (or the beneficiary, if different from the policyholder) from the financial loss that results from the death of the life insured.
A
TRUE
- (Insurance is not intended to provide a way of profiting from that death.)
22
Q
As a result, the insurance application is designed to gather as much information about the life insured as possible. name a couple Personal information that the application will require about the life insured.
A
- Current name and any former names;
- Date of birth;
- Current address;
- Social insurance number;
- Country of birth;
- Current nationality or residence status;
- Employer and occupation;
- Bankruptcy history.
[Ref. 9.2.3.1]
23
Q
Chapter 9 - Application & underwriting
There are three main situations involving the application that can lead to problems, what are they?
A
- Mistake;
- Fraudulent misrepresentation;
- Incomplete information.
24
Q
What is Temporary insurance agreement (TIA) ?
A
Insurance agreement, that provide some temporary coverage during the underwriting process.
25
**Explain** the process on how to get approved on a Temporary Insurance agreement (TIA)
- **Submit a completed life insurance application** *(along with at least one month’s premium)*
- **Answer “No”** to a short list of health-related questions about the life insured.
- If the answer to any of the questions on the TIA application is “Yes,” then a TIA is automatically denied.
26
*TRUE OR FALSE?*
The life insured generally must meet certain **age restrictions** *(between a minimum of 2 years old and a maximum of 65 years old)* to be eligible for a TIA.
FALSE
The life insured generally must meet certain age restrictions *(e.g., between a minimum of **15 days old** and a maximum of **70 years old)*** to be eligible for a TIA.
27
In most cases the TIA **coverage** has about **2 limits**, and they are to the *lesser of*...
- A fixed amount, such as **$250,000 or $500,000**;
- The amount of coverage the applicant is requesting.
28
*TRUE OR FALSE?*
TIA’s death benefit will paid if the life insured dies by suicide.
FALSE
TIA coverage is subject to the suicide exclusion provision that applies on base policies so the TIA’s death benefit will **not** be paid if the life insured dies by suicide.
| [Ref 9.3.2]
29
Upon the coverage duration, The TIA remains in effect until the earliest of...
- Its expiry date (usually **60 or 90 days**);
- **The date the policy becomes effective**; and
- The date the **insurance company notifies the applicant** that his application has been denied and returns the premium.
30
*TRUE OR FALSE?*
If the underwriter who is processing the application decides that additional information is required, he may also **revoke** the TIA by advising the applicant in writing and returning the premium.
TRUE
| [Ref. 9.3.3]
31
# *Chapter 9 - Application & Underwriting*
The issuance of a TIA is not an automatic or guaranteed part of the application process. The agent should only issue a TIA if...
- He has no concerns about the application or the likelihood that the underwriter will issue the
requested policy; and
- The applicant submitted the first premium with the application.
32
What is an Attending physician’s statement (APS)?
An acknowledgement that gives the insurance company permission to contact the doctor directly If the application indicates that the life insured has experienced a specified medical issue.
33
The APS usually provides...
- A summary of the life insured’s medical history;
- A description of his current health, medications or other treatments;
- A prognosis from the doctor for any ongoing issues.
34
*FILL IN THE BLANK*
If the underwriter still has concerns about the health of the life insured after receiving an attending physician’s statement, he may ask the life insured to undergo ___________.
a) APS
b) TIA
c) inspection report
d) Medical exam
If the underwriter still has concerns about the health of the life insured after receiving an attending physician’s statement, he may ask the life insured to undergo a **medial exam.**
| [Ref. 9.4.3]
35
*TRUE OR FALSE?*
A medical exam only include the life insured to take a visit to the doctor for an APS.
FALSE
A medical exam could include **more than just a visit to the doctor**; it could include blood, urine or saliva tests, electro-cardiograms (ECGs) and more.
| [Ref. 9.4.3]
36
**Simplify** Medical Information Bureau (MIB)
The MIB is a membership organization
that facilitates an exchange of medical information about applicants between member insurance companies.
37
*TRUE OR FALSE?*
The MIB compiles this information in coded
reports that represent different medical conditions and non-medical conditions *(typically hazardous hobbies and adverse driving records)* that could affect the insurability of the applicant.
TRUE
38
*TRUE OR FALSE?*
The underwriter only uses the MIB report itself as a basis for declining or rating an application.
FALSE
The underwriter cannot use the MIB report itself as a **basis for declining or rating an application**; he must first verify that the problem actually exists.
| [Ref. 9.4.4]
39
**Simplify** Motor vehicle record (MVR)
A report that provides a synopsis of the life insured’s driving history over a specific period *(**3 to 10 years**, depending on the jurisdiction)*.
40
The MVR includes a record of the life insured’s...
- Speeding or other moving violations;
- Chargeable accidents;
- Driving under the influence (DUI) charges;
- License suspensions or revocations;
- Accumulation of points.
41
Why do insurance companies request a motor vehicle report?
A person’s driving record directly influences his risk of death.
42
*TRUE OR FALSE?*
If the underwriter still has concerns about the application, he may hire a service company to investigate the life insured and then prepare an inspection report.
TRUE
| [Ref. 9.4.6]
43
# *Chapter 9 - Application & Underwriting*
Inspection report usually focuses on non-medical issues and could include questions about the life insured’s...
- **Habits** *(E.g., smoking/tobacco use, alcohol consumption)*.
- **Finances** *(E.g., income, estimated net worth)*.
- **Occupation** *(E.g., confirmation of employment, nature of duties)*.
- **Driving record** *(E.g., history of speeding tickets, careless driving*.
- **Avocation** *(E.g., participation in extreme sports or hazardous travel)*.
44
**Explain** financial underwriting
Assessing the applicant’s financial situation and the reason for obtaining life insurance, to determine if:
- The amount of coverage is reasonable based on his need; and
- He can afford the premiums.
45
A **non-citizen** who has been granted **permanent residency status** is generally eligible for the same coverage as a Canadian citizen. However, some additional underwriting may be required, **name some**.
- **Confirmation** of permanent resident status;
- If he has lived in Canada for **less than one year**,
- If he makes **frequent or extended trips** he may be rated as substandard risk
46
# *Chapter 9 - Application & underwriting*
Some insurance companies set maximum coverage amounts on applicants awaiting permanent residency **name some** of the
underwriting guidelines that insurance company may specify.
- Those with a highly skilled or managerial occupation *(e.g., doctors, nurses, pharmacists, engineers, lawyers)* **might qualify for up to $10,000,000** in coverage;
- Those who pursue a trade-level occupation *(e.g., electricians, plumbers, medical technologists, butchers)* **might qualify for up to $2,000,000** in coverage;
- Live-in caregivers *(e.g., nannies, personal support workers)* **might qualify for up to only $250,000** in coverage;
- Dependent spouses or children of the life insured **might qualify for a percentage** of the coverage on the life insured (e.g., 50%)
- *Underwriters **may require noncitizens awaiting permanent residency status** who have lived in Canada for less than a year to **undergo additional medical screening**.*
- *They may also be asked to **provide a copy of their work permit, proof that they have applied for permanent residency status, and proof of a pattern of earned income***.
47
*TRUE OR FALSE?*
For applicants who are *frequent travelers* the issued policy include a standard risk rating.
FALSE
- If the life insured is a frequent traveler, the issued policy may have a **substandard risk rating** *(which would result in higher premiums)*, or it **may specify an exclusion** for travel to specified countries.
48
What are avocations?
Avocations are hobbies or activities that the life insured pursues outside his regular employment.
*(for example)*
- Parasailing;
- Back-country snowboarding;
- Mountain climbing;
- Scuba diving;
- Race car driving;
- Travel to countries prone to conflict;
- Piloting a private aircraft.
49
**Explain** Accelerated underwriting
- Accelerated underwriting leverages technology, existing data, computer algorithms and artificial intelligence (AI) to evaluate applications.
- It also can result in policies issued at or close to fully underwritten retail rates, including preferred and rated classes.
50
What are the risk classes in underwriting ? (6)
- 1. Standard
- 2. Preferred
- 3. Rated
- 4. Exclusions
- 5. Upgraded risk class
- 6. Declined
51
Standard Risk Class
If the life insured falls within the standard risk category, the **premiums** will be set
at the standard rate.
52
Preferred Risk Class
People who fall into this category are eligible for **preferred lower rates** because they present an **exceptionally low risk**.
53
Rated Risk Class
- If the life insured is in a rated risk class, it means that he **represents an above-average, but still acceptable**, level of risk.
- Premiums in a rated class will be **higher** than standard rates.
54
Exclusions Risk class
The insurance company may issue a policy for the appropriate risk class, but specify an **exclusion to the policy**, which means that they will **not** pay the death benefit if death is a case covered by the exclusion.
55
Upgrading risk class
If a policy is issued on a rated basis and the reason for that rating no longer exists, the policyholder may be able to ask the insurance company to remove or decrease the rating, with an appropriate decrease in premiums.
56
Declined risk class
If the life insured falls in the declined risk category, it means he represents an uninsurable risk and coverage is declined.
57
Why would an insurance company consider an upgrading risk class?
- The reason an insurance company would consider such a request is competition
- If the rating is not removed, the policyholder may be tempted to cancel the policy and apply for a new, unrated policy at another insurance company.
58
*TRUE OR FALSE?*
A declined risk class can only be permanent and further reconsideration will cannot be granted due to the high risk of the applicant.
FALSE
- The decline may be **temporary or permanent**, depending on the findings of the underwriter.
- If the decline is temporary, the underwriter will usually specify when reapplication is possible.
- A permanent decline means that no further reconsideration will be granted, regardless of the passage of time.
59
Name **some** factors that may affect the applicant's premiums during the underwriting process.
- Attained Age
- Gender
- Health status or risk class
- Hazardous occupation or lifestyle
- Mortality Cost
- Administrative costs and expenses
- Investment returns
60
**Define** the term *Reinsurance*
An upper limit on the amount of coverage on individuals that the insurance company are willing to assume responsibility for.
61
This upper limit on *reinsurance* is called...
This upper limit on *reinsurance* is called the **retention limit**.
62
*TRUE OR FALSE?*
An insurance company may still accept life insurance applications for amounts in excess of its retention limit.
TRUE
- *In essence, the insurance company insures its risk of having to pay a death benefit that exceeds its retention limit.*
63
**Illustrate** an example of *Reinsurance*
- *John applied for **$15 million** in life insurance coverage with Insure4life Co.*
- *Insure4life’s **retention limit is $10 million**, but they were still interested in placing the policy.*
- *They contacted Resure Co., a reinsurance company, to **underwrite the additional $5 million of coverage**, and Resure agreed.*
- *Insure4life issued a **$15 million policy to John,** and he pays the full premium directly to them.*
- *Insure4life in turn **pays a premium to Resure.** If John dies, **Insure4life will pay the full-death benefit of $15 million**, but then it will receive a **death benefit of $5 million** from Resure.*
64
*TRUE OR FALSE?*
The underwriting process usually stops after the issuing of the policy.
FALSE
The underwriting process does **not stop with the issuing of the policy**; it **continues right up until delivery and acceptance** of the policy.
65
*TRUE OR FALSE?*
Before final delivery of the policy, the agent should obtain verbal and written confirmation that a change in insurability has not occurred.
TRUE
which might be the case if the life insured:
- **Has experienced a change in health**;
- **Changed his occupation**;
- **Changed his recreational activities**;
- **Has experienced a change in financial status**.
*Once the applicant confirms that there has been no material change (and pays any outstanding premiums, if applicable), then the agent can deliver the policy.*
66
*FILL IN THE BLANK*
After accepting the policy, the policyholder must be given a minimum of _______ to review the policy.
a) 3 days
b) 5 days
c) 7 days
d) 10 days
After accepting the policy, the policyholder must be given a minimum of **10 days** to review the policy
- This is the client’s right of rescission, also known as the **“10-day free-look provision.”**
67
# *TRUE OR FALSE?*
Group life insurance are covered for the base amount offered by the plan regardless of their health, because underwriting is not done on an individual basis.
TRUE
68
*FILL IN THE BLANK*
Within the basic group life insurance, premiums are typically quoted as a rate for every ________ of coverage.
a) $10,500
b) $5,0000
c) $2,5000
d) $1,000
Within the basic group life insurance, premiums are typically quoted as a rate for every *$1,000* of coverage.
| [Ref.9.11.1]
69
*TRUE OR FALSE?*
A member with group life insurance who wishes to buy the additional coverage is usually not required to provide evidence of insurability, because they are **covered** by the plan sponsor.
FALSE
A member who wishes to buy the additional coverage is usually **required to provide evidence of insurability**, and the underwriter will assess the member on an individual basis.
| [Ref.9.11.2]
70
*TRUE OR FALSE?*
When creditor insurance is offered through a financial institution, the applicant **must complete the application** with help from the bank employee.
FALSE
When creditor insurance is offered through a financial institution, the applicant must complete the application **without** help from the bank employee, because **that employee is not an insurance agent**.
| [Ref. 9.11.3]
71
**Explain** Post-claim underwriting
- The practice of issuing the policy with little or no underwriting *(i.e., just a couple of yes/no health questions)* and then doing a more thorough underwriting only after the life insured has died.
- Sometimes this post-claim underwriting determines that the **life insured did not actually qualify for insurance, and the claim is denied**.
