Protection Topic 7 – Application, underwriting and ownership

Question 1

The contract that is written up and signed to provide a protection policy is a legal contract, which means there must be a:

Answer 1

• Offer – offer a service
• Acceptance – other party must confirm
• Consideration – agree to transfer something of value

Question 2

Main principles of insurable interest rules:

Answer 2

• II is a quantifiable financial interest
• Sum assured cannot be greater than the financial interest
• Policy must state exactly on whose behalf it has been written on
• II needs only to exist on the date the contract was made

Question 3

Civil partners and spouses have unlimited II in each other, but here are some of the other scenarios that II can be established:

Answer 3

• Parents and children
• Divorcees when a financial settlement is made
• Joint borrowers of a mortgage loan
• Employers for key employees
• Lender over a borrower
• Partners in business

Question 4

In summary, the consumer insurance (disclosure and representations) act 2012:

Answer 4

• Provided better protection for consumers
• Removed requirement for utmost good faith
• Replaced duties for consumer to disclose everything with duty to take reasonable care not to make a misrepresentation
• Enables insurer to take a range of actions if facts are misrepresented

Question 5

Remedies that will be enforced are based off of the nature of the misrepresentation. Misrepresentation can be categorised in 3 ways:

Answer 5

• Honest and reasonable misrepresentation
• Deliberate or reckless misrepresentation
• Careless misrepresentation

Question 6

Remedies can be applied for deliberate, reckless or careless, and in these circumstances the insurer can:

Answer 6

• Treat the contract as if it never existed
• Refuse all claims
• Retain all premiums paid

Question 7

For careless misrep the insurer will apply a remedy depending on whether they still would have

Answer 7

entered the contract knowing the things that had been misrepresented. If they would not have entered, they can refuse claims but premiums returned.

Question 8

Main policy documents issued to customer when setting up a policy:

Answer 8

• Key features illustration (KFI) – issued with recommendations, shows key features of plan they are interested in (customer specific)
• Key features document (KFD) – often a brochure, generic features of the plan (generic)
• Acceptance letter – issued by insurer with complete final offer
• Cancellation notice
• Policy document – confirms details of plan, cover provided and terms and conditions

Question 9

what company creates tables of averages when talking about underwriting

Answer 9

Institute of actuaries

Question 10

The underwriters then use these average premiums and compare it to the individual, using these areas of information to base it off:

Answer 10

• Medical and other personal details
• Occupation and lifestyle
• Financial situation

Question 11

Medical underwriting must be done by

Answer 11

a specialised person (chief medical officer who is essentially a doctor) as it is a difficult task. They have to look into previous health conditions as well as family conditions as some are hereditary. All these details are covered on the proposal form.

Question 12

Additional medical information is not often needed, but may be needed when the sum assured is larger than normal and this can be sought in 3 ways:

Answer 12

• A personal medical attendant’s report – a report from the person’s doctor or any doctor who has dealt with them before, no examination required
• A medical examiner’s report – examination carried out by 3rd party doctor
• If more additional information is required, they may ask for an additional examination or questionnaires etc.

Question 13

Dangerous jobs are considered as well as jobs that have long-lasting health effects such as carpentry where there are dust-filled rooms often.

This is felt most on the income protection policies, where there are usually 3-4 occupational categories for how risky a job is, what are these classes:

Answer 13

• Class 1 – lowest risk, accountants and civil services
• Class 2 – some degree of risk, hairdressers and industrial chemists
• Class 3 – moderate risk of accident and health, farmers and electricians
• Class 4 – highest risk, agricultural engineers, heating engineers and aerial erectors

Question 14

Ordinary/standard rates

Answer 14

• Each company may be different
• May not be perfect health
• The ‘average’

Question 15

Increased rates:

This is for people who are more of a risk than the ‘average person’ this can be done in 4 ways:

Answer 15

• Fixed loading – fixed amount more on each premium
• Percentage loading – pay a % more than the ‘average’ premiums
• Added years (rated-up age) – essentially treats the life as a certain number of years older than it is
• Policy lien – essentially a debt that runs from the start of the term for a number of years, so if initial sum was £100k, lien could be for £50k (decreases by £10k per year) so if the insured dies in the first year, only £50k is paid

Question 16

Postponement

Answer 16

when the policy is postponed if the individual is going through a particularly risky time e.g. pregnancy.

Question 17

The 3 main parties in a policy:

Answer 17

• Provider/issuer/company
• Policyholder
• Life assured

Question 18

3 main ways a trust can be created

Answer 18

• During life
• Upon death following instructions from the will
• Automatically from statutory provisions (e.g. intestacy)

Question 19

Advantages of placing a protection policy into trust

Answer 19

• IHT planning – keeps property out of the estate
• Guaranteed destination for assets
• Quick receipt of benefits
• Protection in the event of bankruptcy

Question 20

Disadvantages of using trusts

Answer 20

• Loss of ownership
• Complexity
• Lack of scope and flexibility
• Demands of appointing enough trustees

Question 21

Statutory trust

Answer 21

• Trust made upon creation of a life policy for example
• Trust established and trustees appointed from declaration when policy is created
• Beneficiaries can only be spouses or children
• Can only be single-life or own-life, cannot be joint-life or life-of-another

Question 22

Policy assignment

Answer 22

this is when the policy is transferred from the policyholder to another individual. A deed of assignment must be written up and then the policy is given to the assignee (the new owner). A notice of assignment must be sent by the assignee to the life company.

Question 23

Maturity claims

Answer 23

• For endowment policies when it comes to the end of the term
• Life company will reach out a month or two before the end
• If policy written in trust, a copy of trust deed is required
• If the policy is assigned, they will want to see the deed of assignment

Question 24

Death claims

Answer 24

Same rules apply for trusts as maturity claims.

On top of this, the following items are required:

• Proof of age – birth certificate, photo ID etc. needed for verification
• Proof of death – death certificate required
• Proof of title – claimant must prove they are entitled to the benefit, whether that be policyholder, legal representative, assignee or trustees

Question 25

For sickness and disability claims, the usual requirements are

Answer 25

* Completed claim form * Proof of title (production of policy document) * Proof of illness or disability

Question 26

For an income protection policy, extra requirements are in force:

Answer 26

* Evidence of claimant’s prior income * Details of any other benefits payable during illness or disability

Question 27

Endorsements

Answer 27

documents issued when a change needs to be made to a policy mid way through the term.

Question 28

Changes that require an endorsement:

Answer 28

* Premium frequency * Mode of premium payment * Sum assured might change * Premium amount * Benefits or options removed or changed