Chapter 5 - Post-Issue Policy Changes Flashcards
Key concepts providing an appropriate frame of reference when considering post-issue policy changes. These include
- Contractual vs non-contractual policy provisions
- Change in amount of risk
- Insurability
- Anti-selection
- Customer/producer/company impact
Contractual vs non-contractual policy provisions
Key among these contractual provisions for the purpose of post-issue transactions are those governing incontestability, grace period, and reinstatement, and for term policies, the conversion privilege.
Contractual - GI increases
Non-contractual - FA increases, smoker to non-smoker changes, risk reclassification - substd to std or std to preferred.
Change in amount of risk
Distinguish between the a change in FA and in the amount of risk.
Sometimes an increase in FA does not increase the risk such as going from plus premium to level.
Insurability
When the policy change is not a contractual obligation, any change in insurability and the evidence needed to evaluate that change will likely be factors to consider.
Can also look for positive changes in health.
Requirements will be similar to those for new business cases.
Anti-Selection (Adverse selection)
The adverse impact upon insurers that occurs when insured’s select insurance coverage for only those risks that are likely to generate losses.
Such selection on the part of the proposed insured can be accompanied by an intent to withhold from the insurer pertinent information related to an adverse change in insurability.
Customer/Producer/Company Impact
Reviewing policy change and the impact on the customer, producer, and company relationship. Factors such as:
- Demographics (upper/lower income)
- Type of producer relationship (captive vs broker)
- Business structure of the insured (stock vs mutual)
- Company philosophy
Changes that would not require underwriting
Address change, name changes due to marriage, modal premium changes, beneficiary and/or ownership changes (in many cases), the exercise of a GI rider, and the conversion of a term policy.
Contestability Period
With few exceptions, life insurance policies have a two year contestability period, during which the validity of the policy contract can be contested by the insurer to material misrepresentations.
Material Misrepresentation
Are statements made that are false, which, had the truth been disclosed, would have resulted in a less favourable risk class then was issued.
Policy changes and contestability period
If the policy change is undertaken during the first 2 policy years, adverse information can come to light that suggests it may have predated the issue date and was not divulged at that time. This situation should be appropriately investigated to determine whether or not the policy should be contested. Failing to do so puts the company at increased risk d/t possible under-pricing, but also essentially waives the right to contest the policy later if a death claim occurs before expiration of the contestability period.
Second, if the policy change occurs after the 2 year contestability period a new contestable period can start with respect to the current transaction. (i.e., increase FA - would result in a contestability period for the increase not the original amount.
Spouse rider - would have a contestability period.
Reinsurance Implications
Business the has been reinsured on an automatic basis (either excess retention or quota-shared) will have a reinsurance treaty provision permitting the ceding company to independently make the decisions necessary to process the post-issue policy changes.
FAC reinsured - these cases require that nay post-issue policy change that materially affects the reinsurers’ share of the business must have the reinsurer’s concurrent approvals.
Conversions
Most term policies include a provision permitting conversion to permanent products without evidence of insurability if requested within a set time frame, typically by an age, such as 65 to 75, or within a set duration, such as 10 to 20 years. When converting, the risk class for the new policy is the same or comparable to the term policy.
Evidence could be required on a conversion when
An increase in face amount
Individual term policy added
Spouse rider
Better risk class
Re-entries
Term insurance policies that have reached the end of their period coverage and are being considered for renewal.
Premium now reflects the new older age of the insured and no current underwriting.
However some will permit the insurer to provide current evidence of insurability in order to qualify for more favourable premiums - equal to A&A although some will minimize requirements.
Guaranteed renewable term
A renewal that can be completed without evidence
1035 Internal Exchanges
Internal Revenue Service allows you to exchange an insurance policy that you won for a new life insurance policy insuring the same person without paying tax on the investment gains earned on the original contract. Can be an internal or external replacement.
Several reasons why a new policy under 1035 exchange has increased risk
- COI’s will reflect actuarial pricing that is based on the expectation of new business w/ full underwriting evidence providing more favourable mortality.
- It is possible that the new premium needed to carry the policy can be less than the premium on the existing policy, despite the insured’s now older age. As a result, although the insurer will have the same death benefit risk, its net amount at risk can be more.
- If the insured’s health has adversely changed in the interim, the exchange can represent an even greater risk.
Therefore they typically require the same evidence as new business.
Reinstatements
Is the process by which a life insurance company puts back in force a life insurance policy that has either
(1) been terminated because of nonpayment of renewal premiums, or
(2) been continued under the extended term or reduced paid up insurance non-forfeiture option.
Typical time frames are between 2-3 years.
Request for reinstatement
Involves completion of a reinstatement application - usually much simpler than new business application. Any additional requirements needed for evidence of insurability are at the discretion of the underwriter, unless it has been FAC reinsured.
Unlike new business, requirements for reinstatements will depend on such factors as
- Was it FAC reinsured
- Policy FA
- Current policy values
- Age of the proposed insured
- Duration policy had been in force
- Duration it has been lapsed
- Whether or not there have been prior lapses and reinstatements of this same policy
- Disclosed health history on the reinstatement application.
Contestability period for reinstatement
Will begin anew if the policy is reinstated, though only with respect to any misstatements that have been made in the reinstatement application.
Change in health for reinstatement
It is common to absorb two to four tables of extra mortality for policies long in force and with short duration of lapse. The justification for this action is that it keeps the case on the books and continue premium income that the company would otherwise lose. An additional consideration in this regard is whether the policy values are high, such as with traditional whole life policy and whether or not the remaining amount at risk is modest. FAC shopped - reinsurance to make final decision. If higher risk - reinstatement must be declined as you cannot reinstate at a higher risk class than the original.
Death Benefit Increases
A request for increasing the policy death benefit is typically handled just like new business, with evidence based on the insured’s attained age and the amount of the increase.
Plan Benefits and/or Riders (such as term riders, annual renewable and convertible term rides, CTB, TDB, WP, and others)
The requirements needed to establish evidence of insurability will vary depending upon the specific rider and the insurers risk tolerance.
WP and TDB - the risk is of morbidity and not mortality.
