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Completing The Application, Underwriting, And

Delivering The Policy
Accurate underwriting depends heavily on an application that
is complete and representative of the potential risks. This
chapter focuses on the producer's first major role as a field
underwriter: completing the application and delivering the
policy. This section discusses the specific steps of the application process,
which includes completing the form itself, collecting the premium, and
delivering the policy. In general, this chapter helps you build a foundation of
insurance concepts that make it easier for you to master the rest of the
material in this course.

TERMS TO KNOW

A d ve r s e s e l e c t i o n — insuring of risks that are more prone to losses than the average risk
A ge n t / P ro d u c e r — a legal representative of an insurance company; the classification of
producer usually includes agents and brokers; agents are the agents of the insurer
A p p l i c a n t o r p ro p o s e d i n s u re d — a person applying for insurance
B e n e fic i a r y — a person who receives the benefits of an insurance policy
D e a t h b e n e fit — the amount paid upon the death of the insured in a life insurance policy
I n s u r a n c e p o l i c y — a contract between a policyowner (and/or insured) and an insurance
company which agrees to pay the insured or the beneficiary for loss caused by specific events
I n s u re d — person covered by the insurance policy; may or may not be the policyowner
I n s u re r ( p r i n c i p a l ) — the company who issues an insurance policy
L a p s e — policy termination due to nonpayment of premium
L i fe i n s u r a n c e — coverage on human lives
Po l i c y o w n e r — the person entitled to exercise the rights and privileges in the policy
P re m i u m — the money paid to the insurance company for the insurance policy

A. Key Concepts And Definitions

Insurance is a transfer of risk of loss from an individual or a business entity to
an insurance company, which, in turn, spreads the costs of unexpected losses to
many individuals. If there were no insurance mechanism, the cost of a loss
would have to be borne solely by the individual who suffered the loss.

Know This! Insurance is the transfer of risk. Insureds' losses are

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transferred over to the insurer.

The term insurance transaction includes any of the following (by mail or any
other means):

Solicitation;
Negotiations;
Sale (effectuation of a contract of insurance); and
Advising an individual concerning coverage or claims.

B. Types Of Insurers
Insurance companies can be classified in a variety of ways based on ownership,
authority to transact business, location of incorporation (domicile), marketing
and distribution systems, or rating (financial strength).

As you read about different classifications of insurers, keep in mind that these
categories are not mutually exclusive, and the same company can be described
based on where it is located and allowed to transact the business of insurance,
who owns it, and what type of agents it appoints.

Stock companies are owned by the stockholders who provide the capital
necessary to establish and operate the insurance company and who share in
any profits or losses. Officers are elected by the stockholders and manage
stock insurance companies. Traditionally, stock companies issue
nonparticipating policies, in which policyowners do not share in profits or
losses.

A nonparticipating (stock) policy does not pay dividends to policyowners;

however, taxable dividends are paid to stockholders.

Mutual companies are owned by the policyowners and issue participating

policies. With participating policies, policyowners are entitled to dividends,
which, in the case of mutual companies, are a return of excess premiums and
are, therefore, nontaxable
nontaxable. Dividends are generated when the premiums and
the earnings combined exceed the actual costs of providing coverage, creating
a surplus. Dividends are not guaranteed.

Before insurers may transact business in a specific state, they must apply for
and be granted a license or Certificate of Authority from the state
department of insurance and meet any financial (capital and surplus)
requirements set by the state. Insurers who meet the state's financial
requirements and are approved to transact business in the state are considered
authorized or admitted into the state as a legal insurer. Those insurers who
have not been approved to do business in the state are considered

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unauthorized or nonadmitted
nonadmitted. Most states have laws that prohibit
unauthorized insurers from conducting business in the state, except through
licensed excess and surplus lines brokers.

Know This! Insurers must obtain a Certificate of Authority prior to

transacting business in this state.

Domicile of Insurer: Insurers can also be defined by their location of

incorporation and whether or not they are authorized to write business in a
state. The insurer's domicile, or location of incorporation, will determine
whether an insurance company is considered domestic, foreign or alien. In the
state they are incorporated in, they are considered a domestic insurer. If the
insurer is operating in a state other than the one they are incorporated in, they
are called a foreign insurer. If the insurer is incorporated outside the United
States, they are considered an alien insurer.

C. Contract Law
A contract is an agreement between two or more parties enforceable by law.
Because of unique aspects of insurance transactions, the general law of
contracts had to be modified to fit the needs of insurance.

1. Elements of a Legal Contract

In order for insurance contracts to be legally binding, they must have 4

essential elements:

1. Agreement — offer and acceptance;

2. Consideration;
3. Competent parties; and
4. Legal purpose.

Offer and Acceptance

There must be a definite offer by one party, and the other party must accept
this offer in its exact terms. In insurance, the applicant usually makes the offer
when submitting the application. Acceptance takes place when an insurer’s
underwriter approves the application and issues a policy.

Consideration

The binding force in any contract is the consideration

consideration. Consideration is
something of value that each party gives to the other. The consideration on the
part of the insured is the payment of premium and the representations made in
the application. The consideration on the part of the insurer is the promise to
pay in the event of loss.

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Know This! Insurer's consideration is the promise to pay for losses;

insured's consideration is the premium and statements on the application.

Competent Parties

The parties to a contract must be capable of entering into a contract in the

eyes of the law. Generally, this requires that both parties be of legal age,
mentally competent to understand the contract, and not under the influence of
drugs or alcohol.

Legal Purpose

The purpose of the contract must be legal and not against public policy. To
ensure legal purpose of a Life Insurance policy, for example, it must have both:
insurable interest and consent. A contract without a legal purpose is considered
void, and cannot be enforced by any party.

2. Distinct Characteristics of an Insurance Contract

Contract of Adhesion

A contract of adhesion is prepared by one of the parties (insurer) and

accepted or rejected by the other party (insured). Insurance policies are not
drawn up through negotiations, and an insured has little to say about its
provisions. In other words, insurance contracts are offered on a take-it-or-
leave-it basis by an insurer. Any ambiguities in the contract will be settled in
favor of the insured.

Aleatory Contract

Insurance contracts are aleatory , which means there is an exchange of

unequal amounts or values. The premium paid by the insured is small in relation
to the amount that will be paid by the insurer in the event of loss.

Life and Health Example:

John purchases a life insurance policy for $100,000. His monthly premium is
$100. If John only had the policy for 2 months, which means he only paid $200
in premiums, and he unexpectedly died, his beneficiary will receive $100,000. A
$200 contribution on the part of the insured in exchange for $100,000 benefit
from the insurer illustrates an aleatory contract.

Property and Casualty Example:

John purchases a homeowners insurance policy for $100,000. His monthly

premium is $100. If John only had the policy for 2 months, which means he only
paid $200 in premiums, and the home was unexpectedly destroyed by a
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covered peril, John will receive $100,000. A $200 contribution on the part of
the insured in exchange for $100,000 benefit from the insurer illustrates an
aleatory contract.

Unilateral Contract

In a unilateral contract, only one of the parties to the contract is legally

bound to do anything. The insured makes no legally binding promises. However,
an insurer is legally bound to pay losses covered by a policy in force.

Conditional Contract

As the name implies, a conditional contract requires that certain conditions

must be met by the policyowner and the company in order for the contract to
be executed, and before each party fulfills its obligations. For example, the
insured must pay the premium and provide proof of loss in order for the
insurer to cover a claim.

3. Representations and Warranties

A warranty is an absolutely true statement upon which the validity of the

insurance policy depends. Breach of warranties can be considered grounds for
voiding the policy or a return of premium. Because of such a strict definition,
statements made by applicants for life and health insurance policies, for
example, are usually not considered warranties, except in cases of fraud.

Representations are statements believed to be true to the best of one's

knowledge, but they are not guaranteed to be true. For insurance purposes,
representations are the answers the insured gives to the questions on the
insurance application.

Untrue statements on the application are considered misrepresentations and

could void the contract. A material misrepresentation is a statement that, if
discovered, would alter the underwriting decision of the insurance company.
Furthermore, if material misrepresentations are intentional
intentional, they are
considered fraud.

Know This! Representations are statements believed to be true.

Insured's statements on the application are representations.

D. Completing The Application

The Application is the starting point and basic source of information used by
the company in the risk selection process. Although applications are not
uniform and may vary from one insurer to another, they all have the same basic

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components: Part 1 - General Information and Part 2 - Medical Information.

Part 1 - General Information of the application includes the general

questions about the applicant, such as name, age, address, birth date, gender,
income, marital status, and occupation. It will also inquire about the existing
policies and if the proposed insurance will replace them. Part 1 identifies the
type of policy applied for and the amount of coverage, and usually contains
information concerning the beneficiary.

Part 2 - Medical Information of the application includes information on the

prospective insured's medical background, present health, any medical visits in
recent years, medical status of living relatives, and causes of death of deceased
relatives. If the amount of insurance is relatively small, the agent and the
proposed insured will complete all of the medical information. That would be
considered a nonmedical application. For larger amounts, the insurer will usually
require some sort of medical examination by a professional.

It is the agent’s responsibility to make certain that the application is filled out
completely, correctly, and to the best of the applicant's knowledge. The agent
must probe beyond the stated questions in the application if he or she has any
reason to believe the applicant is misrepresenting or concealing information, or
does not understand the specific questions asked. Any information that is
misleading, inaccurate or illegible may delay the issuance of the policy. If the
agent feels that there could be some misrepresentation, he/she must inform
the insurance company. Some insurers require that the applicant complete the
application under the agent’s watchful eye, while other insurers require that the
agent complete the application in order to help avoid mistakes and unanswered
questions.

The agent is the company's front line, and is referred to as a field underwriter
because the agent is usually the one who has solicited the potential insured. As
a field underwriter, the agent has many important responsibilities during the
underwriting process and beyond, including the following:

Proper solicitation of applicants;

Helping prevent adverse selection;
Completing the application;
Obtaining the required signatures;
Collecting the initial premium and issuing the receipt, if applicable; and
Delivering the policy.

Know This! A life insurance producer is the company's field underwriter.

As a field underwriter, the agent (or producer) can be considered the most
important source of information available to the company underwriters. The
agent's report provides the agent's personal observations concerning the

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proposed insured. The agent's report does not become a part of the entire
contract, although it is a part of the application process.

1. Required Signatures

Both the agent and the proposed insured (usually the applicant) must
sign the application
application. If the proposed insured and the policyowner are not the
same person, such as a business purchasing insurance on an employee, then
the policyowner must also sign the application. An exception to the proposed
insured signing the application would be in the case of an adult, such as a parent
or guardian, applying for insurance on a minor child.

2. Changes in the Application

When an answer to a question on the application needs to be corrected, agents

have the option, depending on which insurer they represent, of correcting the
information and having the applicant initial the change, or completing a new
application. An agent should never erase or white out any information on an
application for insurance.

3. Consequences of Incomplete Applications

Before a policy is issued, all of the questions on the application must be

answered. If the insurer receives an incomplete application, the insurer must
return it to the applicant for completion. If a policy is issued with questions left
unanswered, the contract will be interpreted as if the insurer waived its right to
have an answer to the question. The insurer will not have the right to deny
coverage based on any information that the unanswered question might have
contained.

4. Collecting the Initial Premium and Issuing the Receipt

Most agents attempt to collect the initial premium and submit it along with the
application to the insurer. In addition, collecting the initial premium at the time
of the application increases the chance that the applicant will accept the policy
once it is issued. Whenever the agent collects premiums, the agent must issue
a premium receipt
receipt. The type of receipt issued will determine when coverage
will be effective.

The most common type of receipt is a conditional receipt receipt, which is used only
when the applicant submits a prepaid application. The conditional receipt says
that coverage will be effective either on the date of the application or the date
of the medical exam, whichever occurs last, as long as the applicant is found to
be insurable as a standard risk, and policy is issued exactly as applied for. This
rule will not apply if a policy is declined, rated, or issued with riders excluding

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specific coverages.

Example:

If an agent collects the initial premium from an applicant and gives the applicant
a conditional receipt, and the applicant dies the next day, the underwriting
process will proceed as though the applicant were still alive. If the insurer ends
up approving the coverage, then the applicant's beneficiary will receive the
death benefit of the policy. If, on the other hand, the insurer determines that the
applicant was not an acceptable risk and declines the coverage, the premium
will be refunded to the beneficiary, and the insurer is not required to pay the
death benefit.

Know This! Conditional receipt means the applicant may be covered as

early as the date of the application.

5. Replacement

Replacement is a practice of terminating an existing policy or letting it lapse,

and obtaining a new one. To make sure that replacement is appropriate and in
the best interests of the policyowner, insurance producers and companies must
take special underwriting measures to help policyowners make informed
decisions.

E. Underwriting
Underwriting is the risk selection process. The underwriter's responsibilities
include selecting only those risks that are considered insurable and meet the
insurer's underwriting standards. The purpose of underwriting is to protect the
insurer against adverse selection (risks which are more likely to suffer a loss).

The primary criteria an underwriter will use in assessing the desirability of a

particular candidate for life insurance includes the applicant's health (current
and past), occupation, lifestyle, and hobbies or habits. The underwriter will use
many different sources of information in determining the insurability of the
individual risk. The specific underwriting requirements will also differ by
insurers.

1. Insurable Interest

To purchase insurance, the policyowner must face the possibility of losing

money or something of value in the event of loss. This is called insurable
interest
interest. In life insurance, insurable interest must exist between the
policyowner and the insured at the time of application
application; however, once a life
insurance policy has been issued, the insurer must pay the policy benefit,

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whether or not an insurable interest exists.

A valid insurable interest may exist between the policyowner and the insured
when the policy is insuring any of the following:

1. Policyowner's own life;

2. The life of a family member (a spouse or a close blood relative); or
3. The life of a business partner, key employee, or someone who has a financial
obligation to the policyowner (such as debtor to a creditor).
Insurable interest is not required of beneficiaries. Since the beneficiary's well-
being is dependent upon the insured, and the beneficiary's life is not the one
being insured, the beneficiary does not have to show an insurable interest for a
policy to be purchased.

Know This! Insurable interest must exist at the time of application.

Know This! The policyowner must have insurable interest in the life of
the insured.

2. Sources of Underwriting Information

In order to properly select and classify insurance risks, the insurer needs to
obtain the applicants' background information and medical history. There are
several sources of underwriting information that are available to the
underwriters.

Application

The person applying for insurance must submit an application to the insurer for
approval for a policy to be issued. The application is one of the main sources of
underwriting information for the company.

Know This! An insurance application is the key source underwriters use

for information about the applicant.

Agent's Report

The agent's report allows the agent to communicate with the underwriter and
provide information about the applicant known by the agent that may assist in
the underwriting process.

Investigative Consumer Report (Inspection)

To supplement the information on the application, the underwriter may order an

inspection report on the applicant from an independent investigating firm or
credit agency, which covers financial and moral information. They are general
reports of the applicant's finances, character, work, hobbies, and habits.
Companies that use inspection reports are subject to the rules and regulations
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outlined in the Fair Credit Reporting Act.

Fair Credit Reporting Act

The Fair Credit Reporting Act established procedures that consumer-

reporting agencies must follow in order to ensure that records are confidential,
accurate, relevant, and properly used. The law also protects consumers
against the circulation of inaccurate or obsolete personal or financial
information.

The acceptability of a risk is determined by checking the individual risk against

many factors directly related to the risk's potential for loss. Besides these
factors, an underwriter will sometimes request additional information about a
particular risk from an outside source. These reports generally fall into 2
categories: Consumer Reports and Investigative Consumer Reports. Both
reports can only be used by someone with a legitimate business purpose,
including insurance underwriting, employment screening, and credit
transactions.

Consumer reports include written and/or oral information regarding a

consumer's credit, character, reputation, or habits collected by a reporting
agency from employment records, credit reports, and other public sources.

Investigative Consumer Reports are similar to consumer reports in that

they also provide information on the consumer's character, reputation, and
habits. The primary difference is that the information is obtained through an
investigation and interviews with associates, friends and neighbors of the
consumer. Unlike consumer reports, these reports cannot be made unless the
consumer is advised in writing about the report within 3 days of the date the
report was requested. The consumers must be advised that they have a right to
request additional information concerning the report, and the insurer or
reporting agency has 5 days to provide the consumer with the additional
information.

The reporting agency and users of the information are subject to civil action for
failure to comply with the provisions of the Fair Credit Reporting Act. A person
who knowingly and willfully obtains information on a consumer from a
consumer reporting agency under false pretenses may also be fined
and/or imprisoned for up to 2 years.

An individual who unknowingly violates the Fair Credit Reporting Act is liable
in the amount equal to the loss to the consumer, as well as any reasonable
attorney fees incurred in the process.

An individual who willfully violates this Act enough to constitute a general

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pattern or business practice will be subject to a penalty of up to $2,500.

Under the Fair Credit Reporting Act, if a policy of insurance is declined or

modified because of information contained in either a consumer or
investigative report, the consumer must be advised and provided with the name
and address of the reporting agency. The consumer has the right to know
what was in the report
report. The consumer also has a right to know the identity of
anyone who has received a copy of the report during the past year. If the
consumer challenges any of the information in the report, the reporting agency
is required to reinvestigate and amend the report, if warranted. If a report is
found to be inaccurate and is corrected, the agency must send the corrected
information to all parties to which they had reported the inaccurate information
within the last 2 years.

Consumer reports cannot contain certain types of information if the report is

requested in connection with a life insurance policy or credit transaction of less
than $150,000. The prohibited information includes bankruptcies more than
10 years old, civil suits, records of arrest or convictions of crimes, or any other
negative information that is more than 7 years old. As defined by the Act,
negative information includes information regarding a customer's
delinquencies, late payments, insolvency or any other form of default.

Medical Information Bureau (MIB)

In addition to an attending physician's report, the underwriter will usually

request a Medical Information Bureau (MIB) report.

The MIB is a membership corporation owned by member insurance companies.

It is a nonprofit trade organization which receives adverse medical
information from insurance companies and maintains confidential medical
impairment information on individuals. It is a systematic method for companies
to compare the information they have collected on a potential insured with
information other insurers may have discovered. The MIB can be used only as
an aid in helping insurers know what areas of impairment they might need to
investigate further. An applicant cannot be refused simply because of some
adverse information discovered through the MIB.

Know This! Insurers cannot refuse coverage solely on the basis of

adverse information on an MIB report.

Medical Examinations

For policies with higher amounts of coverage or if the application raised

additional questions concerning the prospective insured's health, the
underwriter may require a medical examination of the insured. There are two
options, depending on the reason for the medical examination:

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1. The insurer may only request a paramedical report which is completed by a

paramedic or a registered nurse; and
2. The underwriter may require an Attending Physician's Statement (APS)
from a medical practitioner who treated the applicant for a prior medical
problem.

Medical examinations, when required by the insurance company, are conducted

by physicians or paramedics at the insurance company's expense. Usually such
exams are not required with regard to health insurance, thus stressing the
importance of the agent in recording medical information on the application.
The medical exam requirement is more common with life insurance
underwriting. If an insurer requests a medical examination, the insurer is
responsible for the costs of the exam.

It is common among insurers to require an HIV test when an applicant is

applying for a large amount of coverage, or for any increased and additional
benefits. To ensure proper obtaining and handling of results, and to protect the
insured's privacy, states have enacted the following laws and regulations for
insurers requiring an applicant to submit to an HIV test:

The insurer must disclose the use of testing to the applicant

applicant, and obtain
written consent from the applicant on the approved form;
The insurer must establish written policies and procedures for the
internal dissemination of test results among its producers and employees to
ensure confidentiality.

HIPAA

The Health Insurance Portability and Accountability Act (HIPAA) is a federal law
that protects health information. HIPAA regulations provide protection for the
privacy of certain individually identifiable health information (such as
demographic data that relates to physical or mental health condition, or
payment information that can identify the individual), referred to as protected
health information
information. Under the Privacy Rule Rule, patients have the right to view
their own medical records, as well as the right to know who has accessed those
records over the previous 6 years. The Privacy Rule, however, allows
disclosures without individual authorization to public health authorities
authorized by law to collect or receive the information for the purpose of
preventing or controlling disease, injury, or disability.

Use and Disclosure of Insurance Information

Every applicant for a life insurance policy must be given a written disclosure
statement that provides basic information about the cost and coverage of the
insurance being solicited. This disclosure statement must be given to the
applicant no later than the time the application for insurance is signed.
Disclosure statements will help the applicants to make more informed and

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educated decisions about their choice of insurance.

When insurers plan to seek and use information from investigators, they must
first provide the applicant/insured with a written Disclosure Authorization
Notice. It will state the insurer's practice regarding collection and use of
personal information. The disclosure authorization form must be written in plain
language, and must be approved by the head of the Department of Insurance.

3. Risk Classification

In classifying a risk, the Home Office underwriting department will look at the
applicant’s past medical history, present physical condition, occupation, habits
and morals. If the applicant is acceptable, the underwriter must then determine
the risk or rating classification to be used in deciding whether or not the
applicant should pay a higher or lower premium. A prospective insured may be
rated as one of the three classifications: standard, substandard, or
preferred.

Know This! The higher the risk, the higher the premium.

Preferred risks are those individuals who meet certain requirements and
qualify for lower premiums than the standard risk. These applicants have a
superior physical condition, lifestyle, and habits.

Standard risks are persons who, according to a company’s underwriting

standards, are entitled to insurance protection without extra rating or special
restrictions. Standard risks are representative of the majority of people at their
age and with similar lifestyles. They are the average risk.

Substandard (High Exposure) risk applicants are not acceptable at standard

rates because of physical condition, personal or family history of disease,
occupation, or dangerous habits. These policies are also referred to as "rated"
because they could be issued with the premium rated-up
rated-up, resulting in a higher
premium.

Applicants who are rejected are considered declined risks

risks. Risks that the
underwriters assess as not insurable are declined. For example, a risk may be
declined for one of the following reasons:

There is no insurable interest;

The applicant is medically unacceptable;
The potential for loss is so great it does not meet the definition of insurance; or
Insurance is prohibited by public policy or is illegal.

4. Stranger-originated Life Insurance (STOLI) and Investor-originated Life Insurance

(IOLI)

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Stranger-originated life insurance (STOLI) is a life insurance arrangement

in which a person with no relationship to the insured (a "stranger") purchases a
life policy on the insured's life with the intent of selling the policy to an investor
and profiting financially when the insured dies. In other words, STOLIs are
financed and purchased solely with the intent of selling them for life
settlements.

STOLIs violate the principle of insurable interest

interest, which is in place to
ensure that a person purchasing a life insurance policy is actually interested in
the longevity rather than the death of the insured. Because of this, insurers take
an aggressive legal stance against policies they suspect are involved in STOLI
transactions.

Note that lawful life settlement contracts do not constitute STOLIs. Life
settlement transactions result from existing life insurance policies; STOLIs are
initiated for the purpose of obtaining a policy that would benefit a person who
has no insurable interest in the life of the insured at the time of policy
origination.

Investor-owned life insurance (IOLI) is another name for a STOLI, where a

third-party investor who has no insurable interest in the insured initiates
a transaction designed to transfer the policy ownership rights to someone with
no insurable interest in the insured and who hopes to make a profit upon the
death of the insured or annuitant.

F. Delivering The Policy

Once the underwriting process has been completed and the company issues
the policy, the agent will deliver it to the insured. Although personal delivery of

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the insurance policy is the best method of finalizing the insurance transaction,
mailing the policy directly to the policyowner is acceptable. When the insurer
relinquishes control of the policy by mailing it to the policyowner, policy is
considered legally delivered. However, it is advisable to obtain a signed
delivery receipt
receipt.

1. Explaining the Policy and its Provisions, Riders, Exclusions, and Ratings to the Client

Personal delivery of the policy allows the agent an opportunity to make sure
that the insured understands all aspects of the contract. Review of the contract
with the insured involves pointing out provisions or riders that may be different
than anticipated, and explaining what effect they have on the contract. In
addition, the agent should explain the rating procedure to the client, especially
if the policy is rated differently than applied for, or has been modified or
amended in any other way. The agent should also explain any other choices and
provisions available to the policyowner that may become active at this time.

A buyer’s guide provides basic, generic information about life insurance

policies that contains, and is limited to, language approved by the Department
of Insurance. This document explains how a buyer should go about choosing
the amount and type of insurance to buy, and how a buyer can save money by
comparing the costs of similar policies. Insurers must provide a buyer's guide to
all prospective policy applicants prior to accepting their initial premium. If the
policy contains an unconditional refund provision of at least 10 days (free-look
period), a buyer's guide can be delivered with the policy.

A policy summary is a written statement describing the features and

elements of the policy being issued. It must include the name and address of
the agent, the full name and home office or administrative office address of the
insurer, and the generic name of the basic policy and each rider. A policy
summary will also include premium, cash value, dividend, surrender value and
death benefit figures for specific policy years. The policy summary must be
provided when the policy is delivered.

Know This! A buyer's guide provides generic information on various

types of policies. A policy summary provides specific information on the
policy being issued.

The term illustration means a presentation or depiction that includes

nonguaranteed elements of a policy of individual or group life insurance over a
period of years. A life insurance illustration must do the following:

Distinguish between guaranteed and projected amounts;

Clearly state that an illustration is not a part of the contract; and
Identify those values that are not guaranteed as such.

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An agent may only use the illustrations of the insurer that have been approved,
and may not change them in any way.

2. When Coverage Begins

If the initial premium is not paid with the application

application, the agent will be
required to collect the premium at the time of policy delivery. In this case, the
policy does not go into effect until the premium has been collected. The agent
may also be required to get a statement of good health from the insured.
This statement must be signed by the insured, and verifies that the insured has
not suffered injury or illness since the application date.

If the full premium was submitted with the application and the policy was
issued as requested, the policy coverage would generally coincide with the date
of application if no medical exam is required. If a medical exam is required, the
date of the coverage will coincide with the date of the exam.

Know This! NO premium, NO coverage.

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G. USA PATRIOT Act And Anti-Money

Laundering
The Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act, also known as the USA
PATRIOT Act was enacted on October 26, 2001. The purpose of the Act is to
address social, economic, and global initiatives to fight and prevent terrorist
activities. The Act enabled the Financial Crime Enforcement Network (FinCEN)
to require banks, broker--dealers, and other financial institutions to establish
new anti-money laundering (AML) standards. With new rules in place,
FinCEN incorporated the insurance industry into this group.

To secure the goals of the Act, FinCEN has implemented an AML Program that

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requires the monitoring of all financial transactions and reporting of any

suspicious activity to the government, along with prohibiting correspondent
accounts with foreign shell banks. A comprehensive customer identification
and verification procedure is also to be set in place. The AML program consists
of the following minimum requirements:

Assimilate policies, procedures and internal controls based on an in-house risk

assessment, including:
Instituting AML programs similar to banks and securities lenders; and
File suspicious activity reports (SAR) with Federal authorities;
Appointing a qualified compliance officer responsible for administering the
AML program;
Continual training for applicable employees, producers and other; and
Allow for independent testing of the program on a regular basis.

1. Suspicious Activity Reports (SARs) Rules

Any company that is subject to the AML Program is also subject to SAR rules.
SAR rules state that procedures and plans must be in place and designed to
identify activity that one would deem suspicious of money laundering, terrorist
financing and/or other illegal activities. Deposits, withdrawals, transfers or any
other business deals involving $5,000 or more are required to be reported if the
financial company or insurer “knows, suspects or has reason to suspect” that
the transaction:

Has no business or lawful purpose;

Is designed to deliberately misstate other reporting constraints;
Uses the financial institution or insurer to assist in criminal activity;
Is obtained using fraudulent funds from illegal activities; or
Is intended to mask funds from other illegal activities.
Some "red flags" to look for in suspicious activity:

Customer uses fake ID or changes a transaction after learning that he or she

must show ID;
Two or more customers use similar IDs;
Customer conducts transactions so that they fall just below amounts that
require reporting or recordkeeping;
Two or more customers seem to be working together to break one transaction
into two or more (trying to evade the Bank Secrecy Act (BSA) requirements); or
Customer uses two or more money service business (MSB) locations or
cashiers on the same day to break one transaction into smaller
transactions (trying to evade BSA requirements).
Relevant SAR reports must be filed with FinCEN within 30 days of initial
discovery. Reporting takes place on FinCEN Form 108.

H. Chapter Recap

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This chapter explained some of the basic principles and processes of life
insurance underwriting. Let's recap them:

GENERAL CONCEPTS

Insurance Transfers the risk of loss from an individual to an insurer

Based on the principle of indemnity
Based on the spreading of risk (risk pooling) and the law of
large numbers
Insurable Must exist at the time of application
Interest Insuring one's own life, family member, or a business partner

INSURANCE CONTRACTS

Elements of a Agreement - offer and acceptance

Legal Contract Consideration - premiums and representations on the part of
the insured; payment of claims on the part of the insurer
Competent parties - of legal age, sound mental capacity, and
not under the influence of drugs or alcohol
Legal purpose - not against public policy
Contract Adhesion - one party prepares the contract; the other
Characteristics party must accept it as is
Aleatory - exchange of unequal amounts
Conditional - certain conditions must be met
Unilateral - only one of the parties to the contract is legally
bound to do anything
PROCESS OF ISSUING A LIFE INSURANCE POLICY

Underwriting Field Underwriting (by agent)

Application - completed and signed

Agent's report - agent's observations about the applicant
that can assist in underwriting
Premiums with application and conditional receipts
Company Underwriting

Multiple sources of information: application, consumer

reports, MIB
Risk classification - 3 types of risks: standard, substandard,
preferred
Federal Regulations

Fair Credit Reporting Act: protects consumers against

circulation of inaccurate or obsolete information
USA PATRIOT Act/Anti-money Laundering and Suspicious

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Activity Reports Rules

Premium 3 key factors for life insurance: mortality, interest, and
Determination expense
Mode - the more frequently premium is paid, the higher the
premium
Policy Issue Effective date of coverage - if the premium is not paid with
and Delivery the application, the agent must obtain the premium and a
statement of continued good health at the time of policy
delivery

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