Underwriting, another term for risk selection, is the process of reviewing the many characteristics that make up the
risk profile of an applicant to determine if the applicant is insurable and, if so, at standard or substandard rates.
There are two basic questions underwriters seek to answer about an applicant:

► Is the applicant insurable?

► If the applicant and insured are two different people, does an insurable interest exist between the two of them?

Does Insurable Interest Exist?

Insurable interest is extremely important in life insurance. Without this requirement, people could purchase life
insurance and the policy would be nothing more than a wagering contract. As we have established, an insurable
interest exists when the death of the insured would have a clear financial impact on the policyowner. Individuals are
generally presumed to have an unlimited insurable interest in themselves.Therefore, when the applicant and proposed
insured is the same person, there is no question that insurable interest exists. Questions are raised, however, with
third-party contracts (those in which the applicant is not the insured). Some relationships are automatically presumed
to qualify as insurable interest-spouses, parents, children, and certain business relationships. In most other cases,
the burden is upon the applicant to show that an insurable interest exists. Insurable interest cannot be established sufficiently by sentimental attachment alone.

The following is a list of situations where insurable interest exists:

► An individual has an insurable interest in his or her life
► A husband or wife has an insurable interest in a spouse
► Parents have an insurable interest in their children
► A child has an insurable interest in a parent or grandparent
► A business has an insurable interest in the lives of its officers, directors, and key employees
►Business partners have an insurable interest in each other
► A creditor has an insurable interest in the life of a debtor (but only to the extent of the debt)

It bears repeating that with life insurance, an insurable interest must exist only at the policy inception. It does not
necessarily have to exist when the policy proceeds are actually paid. Thus, a policyowner could assign a life policy
to someone who has no insurable interest in the insured, and the assignment would nonetheless be valid.

Is the Applicant Insurable?

Once the underwriter determines that insurable interest exists, the next question is, "Is the applicant insurable?"
The answer lies in the underwriting process.

The underwriting process is accomplished by reviewing and evaluating
information about an applicant and applying what is known of the
individual against the insurer’s standards and guidelines for insurability
and premium rates.

Underwriters have several sources of underwriting information available
to help them develop a risk profile of an applicant. The number of sources
checked usually depends on several factors, most notably the size of the
requested policy and the risk profile developed after an initial review of the application. The larger the policy, the
more comprehensive and diligent the underwriting research. Regardless of the policy size, if the application raises
questions in the underwriter's mind about the applicant, that, too, can trigger a review of other sources of
information. The most common sources of underwriting information include: the application, the medical report, an
attending physician's statement, the Medical Information Bureau, special questionnaires, inspection reports,
and credit reports.

The Application

The application for insurance is the basic source of insurability information. Regardless of what other sources of
information the underwriter may draw from, the application is the first source of information to be reviewed and will
be evaluated thoroughly. Thus, it is the agent's responsibility to see that an applicant's answers to questions on the
application are fully and accurately recorded. There are three basic parts to a typical life insurance application:
Part I-General, Part II-Medical, and Part III-Agent's Report.

Part I-General

Part I of the application asks general questions about the proposed insured, including name, age, address,
birth date, sex, income, marital status, and occupation. Details about the requested insurance coverage are
also included in Part I such as:

► Type of policy
► Amount of insurance
► Name and relationship of the beneficiary
► Other insurance the proposed insured owns
► Additional insurance applications the insured has pending

Other information sought may indicate possible exposure to a hazardous hobby, foreign travel, aviation activity, or
military service. Whether the proposed insured smokes is also indicated in Part I.

Part II-Medical

Part II focuses on the proposed insured's health and asks a number of questions about the health history, not only
of the proposed insured, but of the proposed insured's family, too. This medical section must be completed in its
entirety for every application. Depending on the proposed policy face amount, this section may or may not be all
that is required in the way of medical information. The individual to be insured may be required to take a
medical exam and/or provide a blood test or urine specimen. Physical exams, if requested by the insurer,
are performed at the expense of the insurer.

Part lll-Agent's Report

Part III of the application is often called the agent's report. This is where the agent reports personal observations
about the proposed insured. Because the agent represents the interests of the insurance company, the agent is
expected to complete this part of the application fully and truthfully.

In Part III, the agent provides additional information about the applicant's financial condition and character, the
background and purpose of the sale, and how long the agent has known the applicant. The agent's report also
usually asks if the proposed insurance will replace an existing policy. If the answer is "yes," most states demand that
certain procedures be followed to protect the rights of consumers when policy replacement is involved.

The Medical Report

Quite often, a policy is issued on the basis of the information provided in the application alone. Most companies
have set nonmedical limits, meaning that applications for policies below a certain face amount (perhaps $50,000 or
even $100,000) will not require any additional medical information other than what is provided by the application.
However, for larger policies, a medical report may be required to provide further underwriting information. If the
application’s medical section raises questions specific to a particular medical condition, the underwriter may also
request an attending physician's statement (APS) from the physician who has treated the applicant. An insurer's request
for an attending physician's report must be accompanied by a copy of the signed authorization. The statement
will provide details about the medical condition in question. Medical reports must be completed by a qualified
person, but that person does not necessarily have to be a physician. Many companies accept reports that are
completed by a paramedic or a registered nurse. When completed, the medical report is forwarded to the insurance
company, where it is reviewed by the company's medical director or a designated associate.

The Medical Information Bureau

Another source of underwriting information that specifically focuses on an applicant’s medical history is the Medical
Information Bureau (MIB). The MIB report will also identify life insurance in force with other carriers as well as
lifestyle habits such as drug use. The bureau is formed by more than 700 member insurance companies.

Its purpose is to serve as a reliable source of medical information concerning applicants and help disclose cases
where an applicant either forgets or conceals pertinent underwriting information or submits erroneous or misleading
medical information with fraudulent intent. A Medical Information Report (MIB) may disclose lifestyle habits such as drugs, drinking, overeating and smoking.The MIB operations help to hold down the cost of life insurance for all policyowners through the prevention of misrepresentation and fraud. Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician.

This is how the system works. If a company finds that one of its applicants has a physical ailment or impairment
listed by the MIB, the company is pledged to report the information to the MIB in the form of a code number. By
having this information, home office underwriters will know that a past problem existed should the same applicant
later apply for life insurance with another member company. The information is available to member companies only
and may be used only for underwriting and claims purposes. Information received from the Medical Information
Bureau (MIB) about a proposed insured may be released to the proposed insured's physician.

USA Patriot Act

The USA Patriot Act was enacted in 2001 and requires insurance companies to establish formal anti-money laundering programs. The purpose of the USA Patriot Act is to detect and deter terrorism. A life insurance policy that can be
cash-surrendered is an attractive money laundering vehicle because it allows criminals or terrorists to put
dirty money in and take clean money out in the form of an insurance company check.

Special Questionnaires

When necessary, special questionnaires may be required for
underwriting purposes to provide more detailed information related
to aviation or avocation, foreign residence, finances, military service,
or occupation. For example, if an applicant has a hobby of skydiving,
the insurance company needs detailed information about the extent of
the applicant’s participation to determine whether or not the insurance
risk is acceptable. The most common of these special questionnaires
is the aviation questionnaire required of any applicant who spends a significant amount of time flying.

Inspection Reports

Inspection reports usually are obtained by insurance companies on applicants who apply for large amounts of life
and health insurance. These reports contain information about prospective insureds, which is reviewed to determine
their insurability. Insurance companies normally obtain inspection reports from national investigative agencies or firms and may contain information obtained by a telephone call to the proposed insured.

The purpose of these reports is to provide a picture of an applicant's general character and reputation, mode of living, finances, and any exposure to abnormal hazards. Investigators or inspectors may interview employees, neighbors, and associates of the applicant, as well as the applicant. When an investigative consumer report is
used in connection with an insurance application, the applicant has the right to receive a copy of the report.
An insurer's obligation involving the disclosure of an insured's nonpublic information is to give notice,
explain, and allow opting out.

Inspection reports ordinarily are not requested on applicants who apply for smaller policies, although company
rules vary as to the sizes of policies that require a report by an outside agency.

If an insurance company obtains an inspection report on a prospective insured, it must inform the prospect that
it is permitted to do so under The Fair Credit Reporting Act.

Credit Reports

Some applicants may prove to be poor credit risks, based on information obtained before a policy is issued. Thus,
credit reports obtained from retail merchants’ associations or other sources are a valuable underwriting tool in
many cases.

Applicants who have questionable credit ratings can cause an insurance company to lose money. Applicants with
poor credit standings are likely to allow their policies to lapse within a short time, perhaps even before a second
premium is paid. An insurance company can lose money on a policy that is quickly lapsed, because the insurer’s
expenses to acquire the policy cannot be recovered in a short period of time. It is possible that home office
underwriters will refuse to insure persons who have failed to pay their bills or who appear to be applying for more
life insurance than they reasonably can afford.

The Fair Credit Reporting Act of 1970

To protect the rights of consumers for whom an inspection or credit report has been requested, Congress in 1970
enacted the Fair Credit Reporting Act. As previously mentioned, this federal law applies to financial institutions that
request these types of consumer reports. Insurance companies fall under this category.

Applicant Ratings

Once all the information about a given applicant has been reviewed, the underwriter seeks to classify the risk that the
applicant poses to the insurer.This evaluation is known as risk classification. In a few cases, an applicant represents a risk so great that the applicant is considered uninsurable, and the application will be rejected. However,
the majority of insurance applicants fall within an insurer's underwriting guidelines and will accordingly be
classified as a preferred risk, standard risk, or substandard risk.

Preferred Risk

Many insurers reward good risks by assigning them to a preferred risk classification. Companies issue preferred risk policies with reduced premiums with the expectation of better than normal mortality or morbidity experience. Characteristics that contribute to a preferred risk rating include not smoking, weight within an ideal range, and not drinking.

Standard Risk

Standard risk is the term used for individuals who fit the insurer's guidelines for policy issue without special
restrictions or additional rating. These individuals meet the same conditions as the tabular risks on which the
insurer's premium rates are based.

Substandard Risk

A substandard risk is one below the insurer’s standard or average risk guidelines. An individual can be rated as
substandard for any number of reasons: poor health, a dangerous occupation, or attributes and habits that could be
hazardous. Some substandard applicants are rejected outright. Others will be accepted for coverage but with an
increase in their policy premium.

As noted earlier, an agent plays an important role in underwriting. As a field underwriter, the agent initiates the
process and is responsible for many important tasks: proper solicitation, completing the application thoroughly and
accurately, obtaining appropriate signatures, collecting the initial premium, and issuing a receipt. Each of these tasks
is vitally important to the underwriting process and policy issue.

Proper Solicitation

As a representative of the insurer, an agent has the duty and responsibility to solicit good business. This means that
an agent's solicitation and prospecting efforts should focus on cases that fall within the insurer’s underwriting
guidelines and represent profitable business to the insurer. At the same time, the agent has a responsibility to the
insurance-buying public to observe the highest professional standards when conducting insurance business.

As in many states, an agent is required to deliver to the applicant a Life Insurance Buyer’s Guide and a Policy
Summary. These documents are usually delivered before the agent accepts the applicant’s initial premium.
Typically, the buyer's guide is a generic publication that explains life insurance in a way that average consumers can
understand. It speaks of the concept in general terms and does not address the specific product or policy being considered.

The policy summary addresses the specific product being presented for sale. It identifies the agent, the insurer, the
policy, and each rider. It includes information about premiums, dividends, benefit amounts, cash surrender values,
policy loan interest rates, and life insurance cost indexes of the specific policy being considered.

Completing the Application

The application is one of the most important sources of underwriting information and it is the agent's responsibility to
see that it is completed fully and accurately. An insurance company will return the application to the agent if the agent submits an incomplete application. Statements made in the application are used by insurers to evaluate
risks and decide whether or not to insure the life of the applicant. An applicant’s statements are considered
representations. Representations are statements an applicant makes as being substantially true to the best of the
applicant's knowledge and belief, but which are not warranted to be exact in every detail. Representations must be
true only to the extent that they are material to the risk.

Warranties are statements that are guaranteed to be correct. A warranty that is not literally true in every detail, even
if made in error, is sufficient to render a policy void. If an insurer rejects a claim based on a representation, it bears
the burden of proving materiality. Representations are considered fraudulent only when they relate to a matter
material to the risk and when they were made with fraudulent intent.

Each application requires the signatures of the proposed adult insured, the policyowner (if different from the
insured), and the agent who solicits the application. The applicant's signature is required on a life insurance
application to represent that the statements on the application are true to the best of the applicant's knowledge.
By reading and signing the insurance application, the applicant should realize that any false statements on an insurance application could lead to loss of coverage.

Where required by state law, the agent also must sign a form attesting that a disclosure statement has been given to
the applicant. Moreover, a form authorizing the insurance company to obtain investigative consumer reports or
medical information from investigative agencies, physicians, hospitals, or other sources generally must be signed by
the proposed insured and the agent as witness. The name of the insurance company and the agent’s name and
license identification number must appear on the application. It may be printed, typed, stamped, or handwritten,
if legible.

Changes in the Application

The application for insurance must be completed accurately, honestly, and thoroughly, and it must be signed by the
insured and witnessed. When an applicant makes a mistake in the information given to an agent in completing the
application, the applicant can have the agent correct the information, but the applicant must initial the correction. If
the company discovers a mistake, it usually returns the application to the agent. The agent then corrects the mistake
with the applicant and has the applicant initial the change.

Initial Premium and Receipts

It is generally in the best interests of both the proposed insured and the agent to have the initial premium paid with
the application and forwarded to the insurer. For the agent, this will usually help solidify the sale and may accelerate
the payment of commissions on the sale. The proposed insured benefits by having the insurance protection become
effective immediately, with some important restrictions. However, if a premium is not paid with the application,
the agent should submit the application to the insurance company without the premium. The policy will not become
valid until the initial premium is collected. Recall that one of the requirements for a valid contract is consideration.
In the case of an insurance contract, the consideration is the first premium payment plus the application. An insurer will
not allow an applicant to possess a policy without receipt of the initial premium.

Conditional Receipts

The most common type of premium receipt is the conditional receipt. A conditional receipt indicates that certain
conditions must be met in order for the insurance coverage to go into effect. The conditional receipt provides that
when the applicant pays the initial premium, coverage is effective on the condition that the applicant proves to be
insurable either on the date the application was signed or the date of the medical exam. For example, suppose the
applicant dies between the dates of application or of the medical exam and the date the insurer actually approves
the application. In this case, the coverage is retroactively effective, as long as the applicant proves to be insurable
on the specified date. However, with the conditional insurability receipt, if the applicant proves to be uninsurable as
of the date of application or of the medical exam, no coverage takes effect and the premium is refunded.

Binding Receipts

Under a binding receipt, coverage is guaranteed until the insurer formally rejects the application. Even if the
proposed insured is ultimately found to be uninsurable, coverage is still guaranteed until rejection of the application.
Since the underwriting process can often take several weeks or longer, this can place the company at considerable
risk. Accordingly, binding receipts are often reserved only for a company's most experienced agents. Like the
conditional receipt, a binding receipt typically stipulates a maximum amount that would be payable during the
special protection period.

Policy Effective Date

An important question in any life insurance sale is when the policy become effective. The effective date is
important for two reasons: not only does it identify when the coverage is effective, it also establishes the date by
which future annual premiums must be paid. If a receipt (either conditional or binding) was issued in exchange for the
payment of an initial premium deposit, the date of the receipt will generally be noted as the policy effective date in
the contract.

If a premium deposit is not given with the application, the policy effective date is usually left to the discretion of the
insurer. Often, it will be the date the policy is issued by the insurance company. However, the policy will not be truly
effective until it is delivered to the applicant, the first premium is paid, and a Statement of Continued Good Health
is obtained.

Backdating

As we have learned, the premiums required to support a life
insurance policy are determined, in part, by the insured’s age. If
an applicant can be treated by the insurance company as being a
year younger, the result can be a lifetime of slightly lower premiums.
The purpose of backdating a life insurance policy is to use premiums
based on an earlier age. Thus, it is understandable that applicants might want to backdate a policy, making it effective
at an earlier date than the present.

Many insurers are willing to let an applicant backdate (or “save age”) a policy. However, there are some important
conditions that must be met before this step can be taken. First of all, the insurer must allow backdating. Second, the
company will usually impose a time limit on how far back a policy can be backdated (typically six months). More
important, the policyowner is required to pay all back-due premiums and the next premium is due at the backdated
anniversary date.

After the underwriting is complete and the company has decided to issue the policy, other offices in the company
assume the responsibility for issuing the policy. Once issued, the insurance contract is sent to the sales agent for
delivery to the applicant. The policy usually is not sent directly to the policyowner since, as an important
legal document, it should be explained by the sales agent to the policyowner.

Constructive Delivery

From a legal standpoint, policy delivery may be accomplished without physically delivering the policy into the
policyowner's possession. Constructive delivery is accomplished technically if the insurance company
intentionally relinquishes all control over the policy and turns it over to someone acting for the policyowner,
including the company's own agent. Mailing the policy to the agent for unconditional delivery to the policyowner
also constitutes constructive delivery, even if the agent never personally delivers the policy. However, if
the company instructs the agent not to deliver the policy unless the applicant is in good health, there is no
constructive delivery.

Mere possession of a policy by the client does not actually establish delivery if all conditions have not been met. For
example, a policy may be left with an applicant for inspection and an inspection receipt obtained to indicate that the
policy is neither in force during the inspection period nor will it be in force until the initial premium has been paid.

Explaining the Policy and Ratings to Clients

Most applicants will not remember everything they should about their policies after they have signed the application.
This is another reason agents should deliver policies in person. Only by personally delivering a policy does the
agent have a timely opportunity to review the contract and its provisions, exclusions, and riders. In fact, some
states (and most insurers) insist that policies be delivered in person for this very reason.

The agent's review is especially important, for it helps to reinforce the sale and preventing a potential lapse. It can
also lead to future sales by building the client’s trust and confidence in the agent's abilities.

Explaining the policy and how it meets the policyowner's specific objectives helps avert misunderstandings, policy
returns, and potential lapses. Agents sometimes may have a chance to prepare applicants in advance when it
appears that policies may be rated as substandard, which normally requires an extra premium. Occasionally, both
agent and policyowner may be surprised when the policy is issued as a rated contract. In either case, the agent
usually can stress reasons why the insured has an even greater need for insurance protection because of the
physical impairment or condition. Indeed, it may be the policyowner's last chance to purchase such coverage
because a worsening of the condition responsible for the rating could render the person completely uninsurable.

Obtaining a Statement of Insured's Good Health

In some instances, the initial premium will not be paid until the agent delivers the policy. In such cases, common
company practice requires that, before leaving the policy, the agent must collect the premium and obtain from the
insured a signed statement attesting to the insured's continued good health.

The agent then is to submit the premium with the signed statement to the insurance company. Because there can be
no contract until the premium is paid, the company has a right to know that the policyowner has remained in
reasonably good health from the time the policyowner signed the application until receiving the policy. In other
words, the company has the right to know if the policyowner represents the same risk to the company as when the
application was first signed.