Underwriting & Policy Issue
A Note before we begin: The following chapter is for ALL exams. Some Health insurance policies will require proof of good health, Evidence of Insurability (EOI), in order to obtain the health insurance policy. We will be discussing underwriting and at what point a person is covered. These examples are in the context of life insurance, but if you take out “life insurance” and replace it with “disability income,” “long term care” and other health policies, the outcome would be the same. Please understand this chapter thoroughly.
MR. WATSON: Underwriting, another term for risk selection, is the process of evaluating and selecting risks. And that's important. In other words, everybody is going to be evaluated, everybody is going to be looked at, and we might rate you if you bring a degree of risk that's higher than the company's standard guidelines.
MR. WATSON: That's what this chapter is really concerned with. Underwriting is another term for risk selection. It's a process of reviewing the many characteristics that make up the risk profile, and then to determine whether he's standard or substandard.
MR. WATSON: All right. We talked about insurable interest in a previous chapter. When must insurable interest exist? Only at the inception of the policy, which is at the time of application. Prevents wagering. Spouses, siblings, children & certain business relationships.
The Underwriting Process
MR. WATSON: The Underwriting Process. The more insurance you buy, the more comprehensive and diligent the underwriting process. In other words, if you are older, even a small amount of insurance is going to trigger a medical exam. If you are younger and you want a whole lot of insurance, it's going to trigger some exams.
WOMAN: What do you mean by that, "trigger"?
MR. WATSON: Well, not everybody is going to need an exam. So let's take a 25-year-old person who's in good health. They might be able to get $100,000 without an exam. A 48-year-old guy, he probably would need an exam for the same amount of insurance. If the same 25-year-old person wanted a half a million dollars of insurance, they would need an exam and maybe some blood work, have a nurse come out or a doctor or somebody like that. A 48-year-old guy would have to get on the treadmill, you know, on the rat machine.
MR. WATSON: So, the more insurance, or the older you are, or even when you are older if you're buying a smaller amount of insurance, that can trigger exams and extensive research into the background to determine whether we're going to insure the guy. Other things that could generate a medical exam would be smoking, medications, being overweight, anything that could affect your health or life expectancy.
Application
MR. WATSON: Now, the first source of insurability information is the application. That's the first time the insurance home office underwriter is going to know that the applicant exists. Does that make sense?
ALL: Yes.
MR. WATSON: There's basically three parts to the application.
- Part 1, General
- Part 2, Medical
- Part 3, Agent's Report
Part 1 - General
MR. WATSON: Part one is general. Name, rank, serial number, do you have any other insurance? Do you have any insurance pending? Have you applied for any? Do you smoke? Those general types of questions about the insured.
Part 2 - Medical
MR. WATSON: Part two is the medical report. Now, for a young person, let's say you are 24. For a 24-year-old, let's assume you are not on any medication, you are in good health. She may be able to get up to a $100,000 of insurance without an exam. That's called non-medical. Each company will determine their own limits. They have their own underwriting limits. But if she needs a dollar amount above that, that might trigger an exam.
MR. WATSON: Now, the insurance company pays for the exam. It's a nurse, a doctor, a paramedic, anybody that's been authorized to come out to your house, your business, wherever, to have this exam done. Maybe they want just a finger stick of blood. Maybe they want to draw blood. Maybe it's the EKG. So not all applicants are going to require an exam. But they do have to complete the medical part.
MR. WATSON: So in a lot of cases, for this 24-year-old woman, for $100,000 of insurance, perhaps with Company A, the agent's health questions to her will suffice. Do you have this disease or in the last two years have you seen a doctor? Any medications? I, the agent, am asking her the health questions. Let's say she wanted $200,000 of insurance or anything above the company's underwriting limits that would trigger the exam. Does that make sense?
ALL: Yes.
MR. WATSON: Always remember: The application is never complete until the exam has been completed, if one was required. I did not say "evaluated." I said "completed." When is the exam complete? When they take the needle out of your rear-end. I didn't say "evaluated." When they say, "We're done." When the examiner signs the form, saying "we're finished with this exam." Who has the exam? The nurse or the doctor, the paramedic. Do y'all agree?
ALL: Yes.
MR. WATSON: Now, you need to know that the medical exam is also called a physical exam, and when the company wants a medical exam they pay for it. The insurance company pays for it. You also need to know that the medical exam does not have to be done by a doctor. The exam can be done by a nurse, physician’s assistant, paramedic, clinician, anyone with the appropriate medical training.
MR. WATSON: Now, remember in Chapter 3 we were talking about laws and what makes up a contract and things of this nature? There were four essential elements in every contract. The acronym was CLOC. Can you tell me what the "C" stood for?
STUDENTS: Consideration.
MR. WATSON: Very good. What was the consideration on the part of the applicant? I told you when we went over it, I said it was going to be real important in another chapter. Here it is. What was the consideration on the part of the applicant?
ALL: Premium and completed application.
MR. WATSON: Premium and completed application. The consideration on the part of the company was the promise to pay. So you have to have a completed application and you have to have money for consideration.
MR. WATSON: So the nurse has the exam. If you have given me the application and money, you may be insured right then, because you have given me, the agent, consideration. Does that make sense?
ALL: Yes.
MR. WATSON: We're going to talk about that more in a minute.
MR. WATSON: There's three parts to an application. G. M. A.
- General
- Medical
- Agent's report