Underwriting: insurable interest, medical information, and risk classification

Correct answer: The process an insurer uses to decide whether it can accept an application and, if so, on what basis, so the proper premium is charged

Underwriting is the process by which a life insurer determines whether it can accept an application for life insurance and, if so, on what basis, so that the proper premium is charged. The underwriter reviews the application and decides whether the applicant is acceptable and at what premium rate.

Correct answer: A substantial interest engendered by love and affection

The statute defines insurable interest, for persons closely related by blood or by law, as a substantial interest engendered by love and affection. No economic stake needs to be shown.

Correct answer: Dana collects the death benefit, because insurable interest only had to exist when the policy was issued

A policy on another person's life is valid if the beneficiary had an insurable interest in the insured at the time the contract was made. Dana had one as a spouse when the policy issued, so the later divorce does not defeat her claim.

Correct answer: Any person, firm, association or corporation he chooses

Any person of lawful age may, on his own initiative, procure insurance on his own life for the benefit of any person, firm, association or corporation. You always have an insurable interest in your own life.

Correct answer: His father must apply for the policy or consent to it in writing

Except for group and family insurance and narrow exceptions, no contract of insurance on a person may be made unless the insured, being of lawful age or competent to contract, applies for or consents in writing. A spouse insuring a spouse is an exception; an adult child insuring a parent is not.

Correct answer: The applicant may be accepted, but an additional premium is charged for the greater probability of a shorter life span

A substandard risk is an applicant who does not meet the requirements set for the standard risk. An additional premium is charged on substandard risks to provide for the probability that the person will have a shorter life span than a standard risk.

Correct answer: A database shared by member insurers that holds coded information about impairments disclosed in earlier applications

The Medical Information Bureau is a nonprofit, member-insurer database of coded impairment information reported from previous applications. Underwriters use an MIB report as an alert to look further; it is not itself a basis for declining an applicant.

Correct answer: The tendency of people who are worse-than-average risks to seek insurance, or more insurance, than others

Adverse selection is the tendency of poorer risks to seek or keep insurance at a higher rate than average risks. Underwriting exists largely to guard against it so that premiums match the risk accepted.

Correct answer: Yes. A wife or a husband may effect insurance on the life of the other spouse without that written consent

The written-consent requirement has exceptions. One is that a wife or a husband may effectuate insurance upon the person of the other.

Correct answer: 14 years and 6 months

A person with an insurable interest in a minor under the age of 14 years and 6 months, or a person on whom the minor depends for support, may insure the minor without the minor's written consent, in amounts not exceeding the limits specified in the statute.

Correct answer: A company that depends on its chief engineer, whose death would cost it revenue and recruitment expenses

For persons other than close relatives, insurable interest is a lawful and substantial economic interest in the continued life, health or bodily safety of the insured, as distinguished from an interest that would arise only by, or be enhanced in value by, death. An employer losing a key employee has an interest in the employee staying alive.

Correct answer: A stranger-originated life insurance (STOLI) transaction, which New York prohibits

Buying a new life insurance policy with a primary purpose of selling it to a third party may be a stranger-originated life insurance transaction, which the New York Insurance Law prohibits. It lets investors with no insurable interest wager on a stranger's life.

Correct answer: An attending physician's statement (APS)

An attending physician's statement is a report from the applicant's own physician summarizing the medical history, diagnoses and treatment. Underwriters order it when the application or exam raises questions, or for larger amounts.

Correct answer: A standard risk

A standard risk is a person applying for life insurance who fits the physical, occupational and other standards on which the normal premium rates are based.

Correct answer: A score of 150, which places the applicant in a substandard class

In the numerical rating system, every applicant starts at 100, which represents a standard risk. Debits for unfavorable factors are added and credits for favorable ones are subtracted: 100 plus 75 minus 25 equals 150, above standard, so the applicant is rated substandard.

Correct answer: That such a report may be made, and that the applicant has rights to ask its scope and dispute errors

For an inspection report, which the Fair Credit Reporting Act calls an investigative consumer report, the applicant must be told in writing, no later than three days after the report is first requested, that such a report may be made. That disclosure must also tell the applicant of the right to ask for the nature and scope of the investigation, and must come with the Act's summary of consumer rights, which include seeing the agency's file and disputing inaccurate information. If coverage is declined or rated because of any consumer report, the applicant must also be told which agency supplied it.

Correct answer: Notify the employees in writing, obtain their written consent, and tell them they may have the coverage discontinued at any time

An employer, or a qualifying employer trust, has an insurable interest in employees and retirees who participate or are eligible to participate in an ERISA employee benefit plan, provided it notifies them in writing, obtains their written consent, gives each consenting insured the right to have the coverage discontinued at any time, and describes how to do so.

Correct answer: The insured's executor or administrator

If the beneficiary, assignee or other payee under a contract made in violation of the insurable interest rule receives benefits on the death, disablement or injury of the insured, the insured or his executor or administrator may maintain an action to recover them.

Correct answer: Mortality, interest and expense

The premium for a life policy rests on two underlying concepts, mortality and interest, plus a third variable, expense: the amount the company adds to cover operating costs such as selling, investing premiums and paying claims.

Correct answer: The applicant's medical history and health information

A life application is commonly divided into Part 1, general information such as identity, owner, beneficiary, amount and occupation, and Part 2, the medical history. The producer's report is a separate section completed by the agent.

Correct answer: Correct the answer and have the applicant initial the change

As field underwriter, the producer asks every question as written and records the answers accurately. Corrections to an application must be initialed by the applicant so the record reflects the applicant's own statements.

Correct answer: A creditor's insurable interest is generally limited to the amount of the debt, so most of the coverage lacks an insurable interest

A creditor has a lawful economic interest in a debtor's continued life, but that interest is measured by the debt. Coverage far beyond the loan would give the creditor an interest enhanced by the debtor's death, which insurable interest does not allow.

Correct answer: The applicant's specific written consent to the HIV test, with the results kept confidential

Insurers may test life applicants for HIV, but only with the applicant's specific written informed consent, and the results must be handled confidentially.

Correct answer: A Type B charitable, educational or religious corporation formed under the not-for-profit corporation law

Notwithstanding the general rules, a Type B charitable, educational or religious corporation formed under the not-for-profit corporation law, or its agent, may procure a life policy on another person and designate itself as beneficiary.

Correct answer: The surviving partner collects, because insurable interest existed when the policy was issued

Partners have a lawful economic interest in each other's continued lives. For a policy on another person, the benefits must be payable to someone with an insurable interest at the time the contract is made, so later dissolution of the partnership does not affect the claim.

Correct answer: Preferred

Preferred classes are for applicants whose health and habits are better than average, and they receive rates lower than standard. Non-tobacco use is often a key preferred criterion.

Correct answer: Accept her but charge a flat extra premium, or exclude the activity where permitted, because a hazardous avocation raises the risk

Underwriting looks beyond health to occupation and avocations. A hazardous hobby such as skydiving, scuba diving or racing usually results in a flat extra premium or, where permitted, an exclusion, rather than a decline.

Correct answer: Yes. Nothing prohibits the immediate transfer or assignment of a policy someone procures on his own life

A person of lawful age may procure insurance on his own life for the benefit of anyone, and nothing in the statute prohibits the immediate transfer or assignment of a contract so procured. A policy bought with a pre-arranged plan to sell it to investors, however, can be STOLI.

Correct answer: A group life insurance policy

The consent requirement applies to every contract of insurance on a person except group life, group or blanket accident and health, and family insurance, and except for a spouse insuring a spouse or insurance on a young minor.

Correct answer: It is a significant risk factor that can lead to a rated premium or a decline

Driving record is a standard life underwriting factor. Serious violations such as drunk driving signal higher accidental-death risk and possible alcohol abuse, and can lead to a rating or a decline.

Correct answer: By applying for the policy or consenting to it in writing

Except for the listed exceptions, no contract of insurance on a person may be made unless, at or before the making of the contract, the insured, being of lawful age or competent to contract, applies for or consents in writing.

Correct answer: The right to have the coverage on her life discontinued at any time, using the method described in the employer's notice

To use the employee-benefit-plan basis of insurable interest, the employer must provide each consenting insured the right to have coverage on his or her life discontinued at any time and describe the method in the notice. When employment terminates, the employer must notify the employee of that right again, unless the employee still has a present or prospective right to benefits under a plan the coverage helps finance.

Correct answer: He is placed in a tobacco-user class at a higher premium than a comparable non-user

Tobacco use is one of the most significant mortality factors. Insurers commonly split classes into tobacco and non-tobacco, with tobacco users paying materially higher premiums.

Correct answer: To estimate how much money it will need each year to pay death claims, based on expected deaths at each age

Mortality tables give the insurer a basic estimate of how much money it will need to pay death claims each year, and let it determine average life expectancy for each age group. Mortality is one of the three premium factors.

Correct answer: Contest the policy and rescind it for a material misrepresentation, since the death occurred within the contestable period

Application answers are representations. A material misrepresentation, one that would have changed the underwriting decision, allows the insurer to contest and rescind the policy during the contestable period, typically returning the premiums paid.

Correct answer: In life insurance it must exist when the policy is issued; in property insurance it must exist at the time of the loss

For a life policy on another person, the payee must have an insurable interest at the time the contract is made; it need not continue until death. Property insurance, by contrast, requires the insured to have an insurable interest when the loss occurs.