CHAPTER FIVE - INDIVIDUAL UNDERWRITING

 

 

Health insurance underwriting is, by its very nature, considerably more complex that life insurance underwriting.  Since in life insurance there is basically only a single cause for a claim, in health insurance there is a multitude of causes for claims in a multitude of degrees.  Disability Income insurance is health insurance and is basically underwritten as a health insurance policy, but it differs in the respect that it only covers the results of sickness or injury, and within well-defined limitations, and for amounts pre-established. 

 

This discussion of health insurance underwriting concentrates on the uniqueness of health insurance underwriting.

 

AGE

 

The age of the insured affects claim costs and the degrees in which it affects these costs depends greatly upon the type of insurance.  It is a given, however, that regardless of the type of health insurance involved, claims will increase by number and by severity of the insured for all types of benefits.

 

Particularly in Long-term Disability Income insurance (and in Long Term Care insurance) the risk can increase as rapidly as that of life insurance death rates.  For Short-term Disability Income insurance (and medical-expense insurance), the increase in risk is not pronounced until the individual reaches age 55. Therefore, Long-term Disability Income insurance, Long Term Care insurance (LTC) policies, and disability riders on life insurance policies, generally have premiums that increase with age as opposed to other types of policies that are renewable at the option of the company.  Many times will use a flat premium for younger ages, with higher rates for renewals (or new policies issued at the older ages).

 

At advanced ages, such as age 60, there has been little need for disability policies as most persons have some sort of retirement income available.  Some Disability Income insurance policies can provide continuing coverage to age 75, or lifetime in some policies – subject to the insured being actively employed. 

 

In respect to age, while there are similarities in Disability Income insurance and LTC insurance, the need for LTC policies increases with increasing age.

 

While adverse selection and moral hazards are considerable problems at the older ages, medical insurance or protection is provided under group policies and government plans, primarily Social Security and Medicare. 

 

There is little argument that the cost of delaying the purchase of Disability Income insurance is very expensive, because not only do premiums increase with age, the amount of coverage a client’s dollars can purchase decreases with the passage of time.  As an example, using a premium that fairly represents that available in the marketplace, and assuming a 180 day elimination period for benefits to age 65, premiums increase by 20% at age 35 compared with age 30.  Further, they increase by 46% for age 40 and 85% for age 45. 

 

Some may think that they will wait until they are older as they will pay fewer premiums to age 65 as premiums will be paid over a shorter period of time.  This does not work out that way.  By using the same premium assumptions (total premiums to age 65 for age 30, $2,000 per month, 180 day elimination period as the starting point), premiums paid for the period to age 65 would increase at age 65 by 3% (i.e., the total amount of premiums paid to age 65 is 3% more than what would have to be paid at age 30, even though there are 5 less years to age 65).  Using the same measurements, for age 40, premiums would increase by 4.5%, and would increase for age 45 by 5.8%.  Therefore, premiums do not increase by the fact that fewer years will remain to be paid.  (To be accurate, the time value of money is not taken into consideration).

 

 

SEX

 

In Disability Income insurance, the sex of the insured is of considerable importance as females are a higher disability risk than males at all ages except up to age 55 and older.  While insurers have attempted to restrict certain risks to keep the premiums as close as possible to being equal between the sexes, restricting benefits for pregnancy, miscarriage, abortion, and other such risks, did not made much difference

 

It was the opinion of underwriters for many years that the difference in the rates was due to moral risk as women were not primarily the breadwinners in the family.  However, companies hesitated to issue (or did not issue) Disability Income insurance to those women who did work, as their work was considered as temporary and intermittent – and if they did issue those policies, they were usually for lower benefits and provided coverage for a shorter period of time than that of men.  Particularly in the field of Long-term Disability Income insurance and life insurance disability riders, these policies were very seldom issued to women.  For other types of health insurance, women would be charged a higher premium than men would, even if the maternity risks were omitted; even if the coverage was excluded, rates for the childbearing ages were higher. 

 

One should not be misled by this seemingly sex bias as disability income morbidity and claim studies supported these higher premiums and these higher rates for female insureds were universally accepted.

 

However, the situation no longer exists in many cases, because due to competition and as the politically correct crowd calls it, a more “enlightened view” by the insurers, sex is not a major factor in underwriting.  Many companies use unisex rates but have an exclusion for normal pregnancy.  In some companies, though, there are still sex-distinct rates.

 

MEDICAL

 

Perhaps the most important factor in underwriting life and health insurance, is the determination of the health condition of the applicant.  In order to determine the health condition, both the health history and the present health condition of the applicant must be known.  The underwriting techniques estimate the probable influence on future claims of the current impairments of the applicant and the previous medical history.

 

It is important to understand that there is a big (sometimes huge!) difference between clinical medicine and insurance medicine.  Very often an underwriter will decline, or rate, or rider, an applicant who goes running to his doctor, who assures him that he is in excellent health and there is no reason that he should have to pay more (or take less coverage).  Any person who has ever been involved in health insurance (or life insurance) will be aware of these situations.

 

There is a simple answer – the doctor takes a Short-term view of the situation.  In other words, if the individual is doing well now and there are no serious problems in the next few years, the physician will not be concerned about the individual’s health.  Conversely, the home office underwriter must consider any latent conditions that can eventually become a very costly disability.

 

In addition, the underwriter must deal with preexisting conditions and so has the responsibility of delving into the past medical history of an applicant. 

 

MEDICAL HISTORY

 

An underwriter will determine the importance of the past medical history of the applicant and relate it to future claims, based upon:

1. the type and nature of the health condition and its severity;
2. the frequency of the attacks or occurrences of the health condition;
3. the degree of permanency of the impairment; and
4. the length of time since recovery from the medical condition.

 

 

The underwriter will pay particular attention to any chronic condition in which the probability of the condition recurring is high.  If the condition is acute (severe) must also be considered, however if the insured has recovered satisfactorily and there is no evidence of permanent impairment and recovery was affected some time in the past, then the underwriter does not consider the condition seriously.  Of course, conditions that are both chronic and severe, such as heart attack, high blood pressure not under control, cancer, etc., will be underwritten with great caution and in most cases, will lead to declination.

 

PRESENT HEALTH CONDITION

 

Along with the past health history of the applicant, the present health condition must be considered by the underwriter.  Obviously, an applicant who is disabled for physical reasons would not be eligible for Disability Income insurance, at least at that time.  If the condition is temporary, the application could be postponed, but usually it is simply declined.  The inability to “purchase fire insurance on a house that was on fire” applies to most all types of insurance. 

 

With the public awareness of physical fitness, most applicants are aware if they really are “fit” when they apply for insurance.  Since most people are not totally “fit,” any abnormal condition must be fully explored, such as overweight and high blood pressure, which by themselves are not disabling, but in particular the combination of the two is an indicator of future heart attacks.  For instance, a person suffering from obesity would take longer to recover from an illness or injury, thereby increasing the Disability Income insurance risk.

 

For LTC insurance in particular, and which has applicability to Long-term Disability Income insurance, the underwriter is concerned with the ability of the applicant to pursue activities of daily living, such as bathing, eating, moving about, dressing, and such.  The underwriter would look for more information about the ability of the applicant to perform these functions.

 

Underweight is an underwriting consideration, particularly if it is substantial.  While this is not an “impairment” per se, it would indicate other medical problems and the past medical history would be carefully reviewed.  A physical examination could be required.  Underweight is not significant by itself.

 

MENTAL HEALTH

 

Underwriters of life and health insurance are all concerned with the mental health of the applicant.  If a person’s health has deteriorated because of age, it would not be that significant in the Disability Income insurance area because of the age limitations, but would still throw up a warning flag.  Insurers do not have good statistics on Alzheimer’s disease or dementia, for example, so they must take a conservative approach to avoid claims because of cognitive impairments that will result in a disability claim.

 

FAMILY HISTORY

 

The age and health status of other family members is important in life insurance and some health insurance policies, but it generally is not significant to any degree in Disability Income insurance underwriting.  It should be considered, though, if the applicant shows early signs of heart disease or diabetes.

 

FINANCIAL

 

Claim statistics prove that very important underwriting factors are the type of the policy and the amount of the benefit.  The definition of disability is important (“own occ,” or “any occ”) or whether the disability must be total or can be partial, as discussed earlier.

 

The length of the elimination period, maximum benefit amount and the benefit period are all major factors to be considered in underwriting  and determining claim rates for disabilities of short duration.

 

Differences in definitions of covered events, and the differences in types and amounts of benefits will show different claim rates.  It is a provable axiom that the greater the benefits in both amount and duration of the benefits, the greater will be the claims rate.  And if the potential benefit exceeds the loss, the number of losses will rise and create a moral hazard as the insured can profit from being disabled or malingering in order to receive benefits.

 

Underwriting must be more conservative if the policy provides for high benefits in respect to amount and/or duration.  Underwriting should be more conservative also for policies covering sickness as opposed to covering accidental injury only.  In normal practice, the most strict underwriting standards are applied to Long-term and non-cancellable Disability Income insurance policies and life insurance disability riders, as there can be no renewal underwriting or premium adjustments.  Conversely, a Disability Income insurance policy that is renewable at the option of the company is underwritten much more liberally.

 

There is a significant number of underwriters in today’s market that feel that underwriting standards should be more severe regardless of renewability provisions because the principal claim problems arise in large, continuing claims instead of repeat claims and further, once an insured is on claim, it makes no difference if the policy is noncancellable or renewable at the option of the company. 

 

There is also some concern that the company may be accused of post-claim underwriting which is illegal in most jurisdictions.  This arises if the insurance company issues insurance with minimum of underwriting and/or background/medical investigations, but then underwrites at time of claim.  It is obvious that the insureds would be screaming at the Department of Insurance, as they would believe that they had insurance when they did not.

 

UNDERWRITING AGAINST MORAL HAZARDS

 

The best underwriting protection against moral hazards is to have a reasonable relationship between the benefit of the insurance and the amount of the (potential) loss.  It is a de facto statement that the insured should share in the loss.  Insurers enforce this by using limited benefit periods, limitations on the amount of the benefits, and provisions in the policy that limits the amount that can be collected in relation to the loss.

 

Disability Income policies rely principally on limiting the amount of benefits in relation to earned income by restricting coverage to an amount contractually proportionate to the earned income of the insured.  This can be either a percentage of the earned income, or a percentage of a stated amount.  In the past, it was common to insure 75% or even 80% of the earned income, but with disability benefits now being included in social and/or governmental programs, this percentage is lower, as discussed earlier in this text.

 

Further, companies establish a maximum benefit amount and a participation limit which defines the maximum amount of disability that they will write on any one individual, regardless of income.  The amount would depend upon the class, with some companies issuing a maximum limit as high as $20,000 or more per month. 

 

The need to return to work is very closely researched by the underwriters, in order to determine the applicant’s unearned income and net worth.  These factors come under extremely close scrutiny in Disability Income insurance.

 

For those applicants with high incomes and for those applying for long duration of benefits, noncancellable or guaranteed-renewable policies and life insurance disability income riders, very strict standards are applied. 

 

AVERAGE EARNINGS CLAUSE

 

If the policy is noncancellable and the benefit duration is long, the average earnings clause is sometimes used.  It provides that if the total benefits under ALL Disability Income policies in force exceed the average monthly earnings of the insured over the previous (two, typically) years; or his current monthly earnings (whichever is greater) – then the policy will pay only the portion of the amount of the benefit due as the amount of these earnings bears to the total benefits under all such Disability Income insurance policies.  This eliminates “stacking” of Disability Income insurance.

 

This clause is not often used, particularly since it does not take into account the take-home pay of the insured, which is most important in today’s high-tax economic climate.  Further, this is a “coordination-of-benefit” provision, which is not allowed in some jurisdictions.  This is sometimes looked at as being in the same category as post-claim underwriting, as the insured would believe that if they paid premiums for coverage, they should be entitled to the coverage.  Historically, if these situations were taken to court, the court (particularly with juries) would agree that coverage should be provided.  Therefore, internal limits of coverage from all sources are entirely legal so underwriters research all available sources to determine if there is other Disability Income insurance with other carriers.  This caution is augmented by the increase in social insurance, as discussed earlier.

 

OCCUPATION

 

For Disability Income insurance, since it is extremely work-related, occupation is a very important underwriting factor as the possibility of being disabled is affected by the applicant’s occupation, and benefits are a function of the occupation. 

 

For Disability Income insurance, insurable occupations are classified into broad groups that have similar claims costs with premiums depending upon each class. The number of classes range from 3 to 6, depending upon the company and the types of coverage provided and expressed in alphabet letters – “A” through “C.”

 

The following examples are derived from an Occupational Manual that uses the highest rating as “AAA” and the lowest as “C.”  This particular manual covers Life Insurance, Waiver of Premium and Accidental Death Benefits also.  The following list is a sample of Classification ratings for various occupations broken down by 12 main industry divisions, and then various subtitles.  The 12 main industries and the subtitles are:

 

NOTE:  THE CLASSIFICATIONS USED IN THIS TEXT ARE FOR ILLUSTRATION AND COMPARATIVE PURPOSES ONLY.  INSURERS HAVE MODIFIED MANY OF THESE CLASSIFICATIONS FOR COMPETITIVE REASONS OR UP-DATING ACCORDING TO MORE RECENT CLAIMS STATISTICS OR LEGISLATIVE OR LEGAL REQUIREMENTS.

 

 

The following illustration is under the Main industry Division of CONSTRUCTION, subtitled BUILDING, HIGHWAY, GENERAL

 

 

For contrast and for general interest, the occupational ratings of sub-title INSURANCE:

 

 

A large percentage of Disability Income insurance policies are written on those in the medical fields, doctors primarily.  Many companies now use AAAA for the top classification, most of them would be shown as AAA in this example.

 

 

* Please note that Midwives and Private Duty nurses are not eligible for income policies, including Disability Income insurance.  The reason is that it is very difficult to verify their income.

 

Occupation is not a factor in Long Term Care Insurance underwriting, or in individually issued medial expense insurance.

 

 

Needless to say, a job description is not necessarily adequate so it is necessary to determine exactly what the responsibilities of the job are.  Questions should be asked, such as:

 

• What are the usual and incidental job activities and requirements?
• Does the applicant have a part-time or additional job in addition to the principal job?
• Does the applicant handle or operate dangerous equipment or risky materials?
• Is travelling involved in the job and if so, to what extent?
• Does the applicant perform his job inside or outside?
• Are there any parts of his job that puts him at bodily risk?

 

 

MORAL HAZARDS AND ADVERSE SELECTION

 

Moral hazards can be defined as “speculation” and presents particular problems in health insurance.  Adverse selection is a process where an uninsurable individual, or one who is at greater risk than average, attempts to get an insurance policy at a standard premium rate.  Underwriters screen applicants carefully for adverse selection because premiums are based upon those persons in average good health and in non-hazardous occupations.

 

In underwriting a Disability Income insurance application, the underwriter must make a subjective judgment as to which individual(s) will be disabled longer in case of accident or sickness, and which one(s) will be more inclined to malinger in case or claim, or which one(s) will take undue advantage of policy provisions.

 

 

One of the most difficult areas to determine and yet one of the most important, particularly in Disability Income insurance underwriting, is the character of the applicant or insured.  Besides the malingering in case of claim, underwriters have to be concerned with hypochondriacs and those who appear to be accident-prone.  In these cases, overinsurance is the main hazard and in addition to limiting the benefits to an amount less than the applicant/insured’s take-home pay and the restriction of duplicate coverage, all areas of investigation that can help the underwriter to determine the moral hazard will be pursued. 

 

There is a rule of thumb, particularly in life insurance but applicable in Disability Income insurance also, that if an individual voluntarily approaches a company requesting coverage, alarm bells go off.  The fear is, of course, that the individual knows something that the insurance company does not and the individual is confident that the insurer will not be made aware of this – an example of adverse selection.  Then, if unstable earnings characterize the individual’s occupation, irregular or seasonal work, or illegal or illicit activities, the application will probably not be approved.  Questionable business practices and ethics, dishonesty in business, criminal activity and other such activity create a less than attractive risk.  If personal habits, such as gambling, drinking to excess, or illicit drug use arise, these will be seriously considered, as well as any evidence of fraud or misrepresentation. 

 

THE APPLICATION

 

Of all of the tools available to the underwriter, the Application is far and away the most important.  Each company has its own version of an application and other forms that it deems necessary for proper underwriting of a Disability Income insurance application.  There is really very little difference in the applications, companies just ask for the same information but in different fashions and the location of important information is located in different areas, depending upon the underwriter’s preference.  The Department of Insurance must approve all applications so they all meet rather standard criteria.

 

Rather than provide a sample copy of an application for this discussion, the items to be completed on an application will be discussed individually.  Basically, therefore, an application for Disability Income insurance will require certain information, as outlined below:

 

Some companies preface the application information regarding the insured, to information regarding the type (plan) of insurance being applied for.  This format is particularly applicable if it is a Buy-Sell or Key Employee type of policy being applied for, and for which the employer may pay part of the premium.  Other companies may simply put this information after the identifying information (name, address, etc.)

 

Questions as to who will pay premiums and the percentage of total premium paid by the employer can appear at the top of this instruction form.  The first section pertains to the Insured premium payor.

 

Monthly Benefit Amount - $ amount is stated

Benefit Period: Stated as 65/65   5/5   or 2/2 by checking the appropriate box.

Elimination Period: Check box as to period.

(Some companies allow additional coverage with a different benefit period or elimination period, and the different amounts are stated separately in this section)

 

If the employer is to pay part of the premiums, this information is asked for the portion paid by the employer.  Again, if additional coverage is requested and the employer will pay for part or this, it is so indicated.

Another section pertaining to Optional Benefits may be contained in this instruction form and may ask for details on information such as the following:  (Note: the amount of premiums paid by the proposed insured and the employer follow, if applicable)

Disability Income Supplement Age 55 – complete amount and elimination period (in days).

Retirement amount.

COLA.  If percentage is used, indicate whether simple or compound

Guaranteed Insurability Rider (Future Increase Option) amounts.

College:  Some companies offer coverage for children under age 16 for a fixed amount, name, birthdate and amount (usually between $1,000 minimum, $50,000 maximum) for each child.

Lifetime Accident, if chosen.

Lifetime Sickness, usually choice of Age 55 or Age 60.

Occupational Rehabilitation – may be available on some business policies.

 

APPLICATION PART I

 

PERSONAL information is requested (Name, Address, DOB, Sex, Birthplace, etc.) along with name of business and address.

The next section is OCCUPATION.

Every application will have very precise instructions as to how to enter the occupation of the applicant.  One company, for instance, asks that the agent circle the occupation if the applicant is an Accountant, Attorney, Trial Attorney, Controller, Dentist, Optometrist, Pharmacist, Physician, Podiatrist, or Psychologist (Ph.D).  If Dentist, Physician or Podiatrist, specialty is required.

If not one of those mentioned above, the Occupation title, length of time employed in that occupation, duties and whether owner, partner or employee.  Number of hours worked per week is also required.

 

Annual earned income (salary, draw, and professional fees) after business expenses as reported on the Federal income tax form for last year and current year.  Unearned income from investments or other sources such as dividends, interest, net rental income, etc. is required, last year and current year.

Some companies require listing of assets and liabilities if the net worth exceeds a specified figure, such as $4 or $5 million. 

Listing of all disability insurance currently in force, or that had been applied for within the past six months, is requested, by Name of Company, Type of Coverage, Benefit Amount, Benefit Period, Elimination Period and status.  Note that this asks for ALL disability insurance, whether individual; Group, Association, Overhead, Key Person, Buy-Sell or Salary Continuation.

The next question is almost always, which of the previous-mentioned disability insurance plans will be changed, not taken, terminated or replaced by the coverage applied for.

Some applications also ask if the applicant has life insurance in force or applied for, and amount.

The next section is generally MEDICAL.

The question will be asked if the applicant had worked in their regular occupation less than the usual number of hours per week because of sickness or injury, over the past (usually 30 or 60) days.

Next most frequently asked question is whether in the past 12 months, the applicant has had any indication of been told that they had, or been treated for cancer, stroke, heart disease or disorder, or psychological or emotional disorder.

(Some companies will indicate if either of the above two questions “yes”, prepayment of premium cannot be accepted.

The remainder of the health questions are rather standard, including asking if the applicant had seen a physician, psychiatrist, etc., over the past 5 years, medication being used and height-weight and weight change over the past year.

The dates of previous treatment are required, along with the name and address of physician or hospital, the reason, treatment and result/diagnosis.

After the Medical section, the next section is usually information as to the type of disability policy that is applied for, allocation of premiums (who pays what), and a listing of optional benefits for individual disability policies.

There is a “Loss Payee” section, which lists to whom the benefits should be paid (insured, business or other).

Billing information is normally the last major section to be completed.

 

If the applicant is applying for Overhead Expense Coverage, there is at least one more page of questions.  In addition to the usual benefit applied for questions, benefit period and elimination period, etc., there is a required breakdown of the total monthly expenses of the business entity that the applicant is liable.

 

There would also be specific billing information, payment mode, etc., required.

 

AGREEMENT OR VERIFICATION OF INFORMATION ON APPLICATION

 

Over the signature of the applicant, the companies all list the items that the applicant agrees to in the application for insurance.  Below is an example from one company to illustrate the wording:

=====================================================================

AGREEMENT                                        

Each of the undersigneds have carefully read this application and understand and agree that

1. all of the statements made in this application must be and are true, complete and correctly recorded to the best of my knowledge and belief;

2. the Company will rely on the information provided in this application and any supplemental applications, medical exams or tests, and other questionnaires to determine whether to provide the requested coverage; those completed documents shall form a part of my contract of insurance; and any coverage provided based on such information is contestable in accordance with the provisions of the policy providing such coverage;

3. no information concerning any matter asked about in the application shall be considered known to the Company unless stated in the application;

4. no agent, broker, medical examiner or other person, except an authorized Home Office employee, may:

a. change or waive questions asked or answers given in the application or the medical exam;

b. determine if I am eligible for a policy;

c. make, or promise that I will be issued a policy of insurance; or

d. change or waive any rights or requirements of the Company;

5.   a. if I do not qualify for the coverage I applied for, the Company may offer a policy with changes in the plan, amount, coverage, premium, classification or benefits. I will have the opportunity to approve those changes and no coverage will be effective without my written agreement;

b. changes made by the Company to correct technical or administrative errors on this application will be considered ratified by me if I accept the policy that is issued unless the changes are prohibited in the State in which the application is signed;

6. if I did not prepay premium with this application, insurance will be effective when a policy has been delivered to me and I have paid the first premium, provided that, on the later of the delivery date or payment date, the answers in the application and in any supplemental application, medical exam or other questionnaire are then still true and complete;

7. if I prepaid premium with this application, insurance will become effective only as provided by the Premium Prepayment Agreement;

8. Effective Date is the date coverage begins; Policy Date is the date the Company uses to determine my age for premium payment and the date from which premiums will be paid. There is no coverage until the Effective Date, even if the Policy Date is earlier,

9. if I stated in response to question 5b on page 2 of this application that I would replace or change existing insurance and I have not done so when a disability begins:

a. any benefits payable by the Company as a result of this application will be reduced by the amount of existing coverage which I said I would terminate; and

b. my premium will be changed to reflect the actual benefits received;

10. payment of all premium is my responsibility as owner of the policy. If my employer, broker, or any other person collects, pays or forwards any part of the premium for this policy, they act as my agent and not as agent for the Company. If the Company does not receive premium as due, the policy will lapse.

Signed at                                                              on                                                               ,19

Witness (Broker)__________________                  proposed Insured_______________

 

Applicant (If other than Proposed Insured)

============================================================================

 

 

DISCLOSURE FORM

 

Following the signature of the applicant, usually there is a disclosure form to be signed by the applicant in accordance with the Fair Credit Reporting Act (described in more detail later in this text).

 

 

BANK DRAFT & PREPAYMENT OF PREMIUMS

 

The remainder of the application generally consists of information for bank draft (if used) including requiring sample check, and a pre-payment agreement.  This agreement is important because it is similar to a conditional binding receipt used with other insurance products, and the wording is important.  This is only used if payment has been made at time of application.  Remember, earlier in the application it stated that prepayment cannot be accepted if the answer to either of two (typically) health questions are answered in the affirmative (the applicant acknowledges having had the medical problems indicated).

 

The following example is used because it has been approved in many states and is a good example of this agreement:

 

There is no “binding receipt” as the insurability date is determined after underwriting requirements have been met.  Whereas with some other lines of insurance, prepayment of premium does not mean that the applicant is insured as of the date of the application, even if they do meet all of the underwriting requirements.  If there are no medical examinations required, and there are no supplemental examinations or other requirements, then the insurability date would be the date of the application.

 

The important thing to understand is the part that is italicized above and deserves more explanation.

 

• The company takes the position that if the applicant qualifies for any coverage with the insurer, they will be offered a policy.
• If the applicant qualifies for the coverage that they have applied for, i.e., type of policy, benefit amounts, benefits period, and elimination period, then the company will offer the applicant that policy.
• If the applicant does NOT qualify for the policy for which they have applied, the company will issue a policy that they deem resembles the policy that they wanted and applied for.  The benefit amount may be different, the benefit period maybe different, or the company may want a different elimination period.  Premiums may be different also. 
• If the applicant accepts the offered policy, the policy will be in force at the date that the applicant wanted the policy that they had originally applied for.  The applicant may change the effective date if they so wish.

 

If the applicant wants a change in the policy after the application has been signed, for instance if they decided that they wanted a longer elimination period, then the company takes the position that the application is no longer prepaid and therefore would not fall within the purview of this agreement.  The new insurability date will then apply – after approval by the company.

 

If the application is declined or if the applicant backs out, or if the policy that was offered by the company is not accepted, then the premiums will be refunded at 7% interest.

 

One other item of interest.  If the applicant does not make a prepayment of premium (no cash-with-app) then the date of insurability cannot be effective before the payment is received in the Home Office.  Typically, if the prepayment check should be returned for insufficient funds, for instance, then coverage date would be when the resubmitted funds are received by the Home Office.  Some companies may take the position that if the prepayment check is refused because of insufficient funds, then the effective date will be when the application is approved by the Home Office, i.e., underwriting has been completed.

 

 

 

OTHER UNDERWRITING CONSIDERATIONS

Foreign travel or residence in a foreign country has to be fully explored because of the difficulty in claims investigation and obtaining underwriting data. 

 

Individuals who participate in hazardous sports may be ridered, for instance, by excluding private aviation, or any injury or sickness suffered as a result, directly or indirectly, from participating in that particular sport or similar or affiliated sports.

UNDERWRITING WITH GENETICS

 

In some fashion, genetic processes influence the majority of the items that can affect the insurability of individuals in life and health insurance.  It can be expected that in the future, genetics, in some fashion, will play an active role in the insuring of individuals.  An in-depth discussion is beyond the scope of this text, however since it will undoubtedly have an important influence on the life and health insurance industry, a brief discussion will help to understand the problems and the benefits of using genetics in underwriting in the future – which could possibly be in the immediate future.

 

With all of the television programs based on the use of DNA for identification purposes – which is the molecule that contains all the genetic information of an individual –there has been a lot of interest in this field.  It is possible to analyze an individual’s DNA and to identify specific genes in the DNA.  Simply put, a gene is the basic unit of heredity and each person has around 100,000 genes (grouped together in “chromosomes”) and every individual inherits 23 pairs of chromosomes from each parent.  Studies continue into identifying and understanding each of the genes and with each new discovery there is a greater understanding of abnormalities of the genes that cause or affect disease.

 

Most scientists believe that abnormalities in genes cause all disease or they strongly influence the ability of the human body to recover from disease or injury.  Genes are classified as either inherited or acquired (from the process of aging or a result of the environment).  It has already been shown that some diseases are caused by inherited genes, such as sickle cell anemia and Huntington’s disease, while most disease are caused by a combination of inherited and acquired abnormalities of the genes.  Diseases such as diabetes, coronary artery disease, cancer, obesity and several others, are caused by the combination of inherited and acquired gene abnormalities. 

 

CONCERN ABOUT TESTING FOR ABNORMAL GENES

 

Naturally, individuals are concerned that if they carry genes that are linked to some medical condition, they may never be able to purchase insurance, or they may have their insurance cancelled or premiums raised.  There is further concern by many that they may be required to obtain gene testing, and unwanted information may be disclosed, resulting in invasion of privacy.  On the other hand, if one-member tests show that there is a gene abnormality, it is possible that other members of the family have the same abnormality. 

 

There is great concern that test subjects may soon become unavailable, as many people just do not want to know about any gene problems they may have and are frightened that others may find out if there is an abnormality.  Also of concern is that insurers would use genetic testing to select only those individuals that are very low risk, thereby creating a “super-class” of insureds which would be good for those with no abnormalities as premiums would be lower and benefits higher.  The problem is, however, that there would then be an “under-class” of those who are not insurable because of the results of genetic testing.

 

These concerns are the basis for many people, including people in authority, to strongly believe that genetic information should not be allowed in underwriting life and health insurance.  This information is considered as “socially unacceptable” regardless of its relevance or how useful it is to the insurance industry.  Insurers, on the other hand, argue that in actuality, they have been using genetic information for years in underwriting as they have required family history inquiries, and besides, they have required or requested information on cancer, diabetes, coronary heart disease and other such diseases that probably have a genetic basis. 

 

Even if there is concern about creating an “under-class” of those with genetic abnormalities, the result would be no different that what occurs with the development of other scientific studies into diseases and other factors used in underwriting.  This could lead to lower premiums as evidenced by the lower premiums offered in many types of insurance for non-smokers as a result of scientific studies. 

 

The main contention of insurers is that even with the advances in science and medical treatments, the “standard” category of insured has always consisted of about 90% of the population.  With genetic testing, science will find cures for some of the disease caused by abnormal genes – already scientists are having remarkable success in treating serious diseases with gene transplants.  These studies will allow many otherwise-uninsurable individuals, to become insurable with gene treatment. 

 

At this particular point in time, there are no insurers that require genetic tests for any line of insurance as such tests are expensive and can be difficult to interpret.  In the future, as individuals are “gene-tested” for diagnosis or treatment, the insurance companies will undoubtedly require knowledge of the test results.  But as long as individuals do not have testing, the insurance companies will (or have to be) content with only results of those tested for other reasons than insurance.

 

STUDY QUESTIONS

 

1.  The underwriting of health insurance policies

        A.  is not as complex as life insurance underwriting.

        B.  is just the same for all health insurance policies.

        C.  is similar in most types of health insurance, but Disability Income insurance only covers the results of sickness or injury, within limitations and for established amounts.     

        D.  is so simple it is usually performed by the agency.

 

2.  In underwriting Long Term Care (LTC) insurance and Disability Income policies, the difference is

        A.  miniscule as the procedures are the same for either type of policy.   

        B.  the need for LTC policies increases with age.

        C.  the need for Disability Income policies increases with age.

        D.  Disability Income can be underwritten by non-technical personnel.

 

3.  In Disability Income insurance, the sex of the insured

        A.  is of little import as the morbidity rate is the same for males and females.

        B.  is not important if pregnancy, miscarriage and abortion are excluded.

        C.  determines the premiums as males have a higher disability risk than females.

        D.  is of importance as females have a higher disability risk than males.

 

4.  The most important factor in underwriting Disability Income insurance policies is

        A.  nationality of the applicant.

        B.  the marital status of the applicant.

        C.  the health condition of the applicant.

        D.  the commissions paid to the agency.

 

5.  Major factors to be considered in underwriting Disability Income policies, does NOT include

        A.  the elimination period.

        B.  the commission structure with overrides.

        C.  the maximum benefit amount.

        D.  the benefit period.

 

6.  The best underwriting protection against moral hazard is

        A.  to have a reasonable relationship between the benefits of the insurance and the amount of potential loss.

        B.  to order the most expensive inspection report.

        C.  to only issue Disability Income insurance policies to those who attend church regularly.

        D.  to issue Disability Income insurance policies only on married persons.

 

7.  Which of the following occupation classifications would be considered the “best” risk?

        A.  AAAA

        B.  A

        C.  D

        D.  C

 

8.  An applicant for Disability Income insurance states that he is a “consultant.”

        A.  That is all that is necessary to be entered on most applications.

        B.  It is important that the agent determine exactly what his job entails.

        C.  He would not be acceptable for insurance as consultants are not insurable.

        D.  All he should do is state as “consultant” for what?  Such as business consultant, etc.

 

9.  When an applicant fills out an application for Disability Income insurance, and they qualify for coverage that is slightly different than that applied for,

        A.  the applicant will be rejected and premiums returned.

B.  the insurer will issue two policies, one that was applied for and the other that the applicant is qualified for, and the applicant can take his choice.

        C.  the applicant will be offered the policy for which they are qualified.

        D.  the applicant must wait 60 days, and apply again.

 

10.  Applicants who participate in hazardous sports

        A.  will always be automatically rejected.

        B.  will be accepted at standard rates and with a standard policy if everything else is OK.

        C.  will usually be ridered so that disability caused by the sport will not be covered.

        D.  will automatically have their premium increased by 25% for one year.

 

ANSWERS TO STUDY QUESTIONS

1C    2B     3D    4C    5B    6A    7A    8B    9C    10C