Module2-3

PART 1 PART 1 of the LLQP course covers the following modules: Module 2: Law Module 2b: Case Studies on Aspects of Law Module 3: Underwriting and Claims Module 4: Professionalism Module 5: Need for lnsurance Module 5b: Case Studies on Determining the Need for lnsurance

Strategies for Success EI Read key words, modules, lessons, and sub-modules in the order they are presented.

EI Memorize all key points.

EI Study each lesson as a "whole": plan to take breaks between lessons, not part way through.

The Law and Llfe lnsurance lntroduction -{ life insurance policy is a contract and, as such, is subject to the provisions of canadian law. It is essential for the agent to understand that it is law that determines many elements of the contract, not the insurance companies. Law mandates who can enter into a contract, basic elements of a contract, contract requirements and provisions, consumer

protection, and what constitutes

a mistake, fraud, or an insurance

ot-fence, among many other aspects.

Thus, the agent will come to see that, at their core, all life insurance policies are fundamentally the same among all insurers; it is the insurance products that vary between companies and the individual u-onditions of these products that distinguish one policy from another.

ln this module: LESSON

1=

Forms of

Law

i

LESSON 2: Life Insurance Contracts LESSON 3: The Definitions of lnsurance LESSON 4: Life lnsurance Contract Requirements LESSON 5: The Two Forms of the lnsurance Gontract LESSON 6: Elements of the lnsurance Gontract LESSON 7: lnsurance Offences and Remedies

The Canadian Life Insurance Course

Some Key Terms to Know absolute assignment: the transfer of all of the rights of the original policy owner to another Pafty, including the right to aPPoint a

insuruble interest: when the death

of the insured would be detrimental or cause harm to the person taking out the insurance.

benefi crary .

beneJiciary: the person receives

all

who

amounts payable

insured: the person who is owner (policy owner) of

the the

policy and pays its premium.

when the contract holder dies.

common

law: the law

which law in

joint Jirst/lust to die: a contract in which more than one life is

comprises the bulk of Canada with the exception of the

insured and settlement is made to

Province of Quebec. Common law is based on custom and usage dating from ancient unwritten laws in England and which were

the benefic:^airy (last to die).

collected together and established

as the Common Law of

either the survivor (first to die) or

lW insured: the person whose life is insured by the life insurance contract.

the

Realm. Also known as case law.

consideration: a part of a contract which indicates the exchange of

minors: individuals who have not reached the age of majority as defined in the province where they reside.

value.

effective dute: the date upon which

the policy takes effect and the

personul contract: a contract ln which the insured and the life insured are the same.

coverage starts.

face amount: the amount of insurance payable. l

the

premium: legally, the consideration for the contract; in other words, the payment required to bring the policy into force and to keep it in force.

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settlement: the amount paid to the benefi ctary when the

life insured

dies.

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The Law and Life Insurance

third pur$ contract: a contract in which'the insured insures the life of another person (the life insured).

Temporary fnsurance Agreement

(TIA): a temporary but binding contract between the insurance company and a proposed life insured to provide coverage during the underwriting process.

For all the key terms for this, and all modules, please see the G|ossary at the beginning of the book.

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LESSON 1: Forms of Law

In

with the exception of the Province of Quebec, Common Law the bulk of law. Common Law has its origins in England and is

Canada,

comprises

based on custom and usage dating from ancient unwritten laws. While every county in England (similar to a province in Canada) had its own set of laws,

part of the laws of each was similar. Eventually, the interests of commerce and

physical proximity demanded a law that was common to all. Accordingly, those features of law that were common to all were collected together and established as the Common Law of the Realm.

Founded on decisions of judges, common law (also called case law) has longestablished custom or precedenl as its guiding principle. Precedent means that

a past or present decision

of

a judge

of a court often serves as the guiding courts. If a higher court makes a decision in

principle in similar cases in other a particular case, that precedent is binding on all lower courts until and unless a higher court reverses it.

Over the years well-defined principles of common law have been established.

These apply to every case that comes before the courts. While applying these principles to each case is often difficult, it has been argued that

it is better to

apply these principles, based upon laws that are known, than to have laws that are so elastic that they can neve-f be known.

Contract Law: A contract is a promise or

a set of promises that the law

will

enforce. These enforceable promises can be divided into two categories:

/

a

/a

simple contract specialty contract (i.e. contracts under seal)

A Simple Contract

A simple contract

can be enforced as long as

it

meets certain requirements.

olfer and acceptance (known as mutual assent or bargain) between the parties entering into the contract. There These requirements are that there must be an

must also be a consideration, which is an exchange of value.

N.B. In a life

insurance contract, the application is the offer, the policy is the

acceptance, and the first premium is the consideration.

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Even

if a simple contract

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meets the test of offer, acceptance, and consideration,

it may be set aside or rendered unenforceable on the grounds of lack of legal capacity, mistake, misrepresentation, fraud or public policy.

A Specialty Contract

A

specialty contruct is also known as a contract under seal becatse a seal

must be affixed to the contract.

A

specialty contract does not require the

elements of offer, acceptance, and consideration.

a civil wrong, as opposed to a criminal wrong.

Personal, social, business, or government activities can harm a person's wealth, property, person, or dignity. Tort law is designed to compensate a person who has been harmed for any damage caused by wrongful civil

Tort Law: Tort

means

behaviour. It also decides when and how much compensation must be paid.

These decisions often depend upon the conduct of the person or body who caused the harm, the type or extent of the harm suffered by the victim, and the

circumstances in which the harm was inflicted.

Life insurance

agents protect themselves from

tort law claims by carrying

Errors and Omissions insurance; a requirement in most jurisdictions.

Criminal law punishes those who have committed offences How are Criminal Law under the Criminal Code of Canada. and Tort Law Tort law focusses on those who have suffered injury or different? damage as a result of criminal or non-criminal conduct, and on their compensation for losses that arise from such conduct.

Classification v

of

Contracts:

A

contract may be deemed

to be

void,

oidable, or unenforceuble.

.\

void contract cannot be completed; it is remedied by putting the situation

A contract is void when it is based Lrn a mistake, or it is illegal. For example, a life insurance contract that lacks rnsurable interest is void. If the object or intent of a contract involves doing

back to the way it was before the contract.

something unlawful, the whole contract is void from the outset. For example,

if

nvo parties contract to sell and buy a ton of wheat at a specified price and specified terms, the contract would be legal and binding but if two parties 2-5

The Canadian Life Insurance Course

contract to sell and buy a ton of heroin at a specified price and specified terms, the contract would be void.

A

contract is voidable

if one of the parties has the option to terminate

the

contract. Contracts with minors are examples of voidable contracts because a minor cannot be bound by a contract.

An unenforceable conftact is a valid contract but it cannot be enforced in the courts

if one of the parties refuses to carry

out its terms.

LESSON 2: Life lnsurance Gontracts This LESS0N is fundamental to understanding the structure of insurance.

The two parties with contractual rights in an insurance contract are the insurance company that accepts the risk (the insurer), and the person who makes the contract with the insurer (the insareQ. The insured is the policyholder or owner of the policy (the policy owner) and he or she benefits from standard provisions in the contract that are specified by the Uniform Life Insurance Act, such as the right to designate a beneficiary.

ffi

insured) does not enjoy these same benefits. He or she has rights under the contract of insurance only when the life insured is the same person as the policy owner (the insared).

The person whose life is insured (the

A contract in which a pe$on

insures his or her own

life and, accordingly, is

both the insured and the life insured, is called apersonul contruct.

What is Personal Life Insured?

James Dandy bought a $100,000 term life insurance policy insuring his own life, and named his estate as beneficiary in the policy.

James is, therefore, both the insured (i.e. he bought and pays the premiums for the policy), and the life insured (i.e. if he dies during the term, the policy proceeds will be paid). lt is only in his capacity as the insured (the policy owner) that James has certain rights in dealing with the policy, including the right to name and change the beneficiary named in the policy.

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A third purty contract ts one in which a person (the insured) insures the life of another person (the life insured).

What is a Third Party Life lnsured?

lf James Dandy had named his wife, Jane, as the life insured, James would have a third party contract with the insurer. The parties to the contract would be James as the insured and policy owner, Jane as the life insured, and the insurance company. When Jane dies, the face amount of the policy will be paid to the beneficiary James names in the contract.

-{ contract in which more than one life is insured is a joint contract, and can be structured as a joint first to die contract or joint last (or second) to die contract.

.\ joint first to die policy will

see the death benefit paid

to the surviving

of the other insured. When this occurs, the policy has paid out and terminates. Sometimes, however, the survivor will have an option 'ri purchasing a new policy of the same face amount without providing e,.'idence of insurability. rnsured upon the death

What is Joint First to Die?

James and Jane Dandy take out a $100,000 joint first to die whole life insurance policy. James and Jane are the lives insured. lf Jane dies first, James receives $100,000. lf James dies first, Jane receives $100,000.

fhe

Uniform Life lnsurance Act legislates individual life insurance contracts in all of Canada except the province of Quebec.

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l-egfs lation

ln Quebec, the Civil Code applies to every life insurance

policy

executed in Quebec, or any person living or keeping a residence in Quebec, if the policy was issued, signed or countersigned, or delivered within Quebec. The Civil Code continues to apply if a policyholder moves from Quebec to another province or territory.

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A joint last to die policy sees the death benefit paid to the beneficiary of the policy when the second of the lives insured dies. The cost of such a policy is much less than a first to die. A last to die policy is very useful for estate planning purposes since the beneficiary receives the death benefit at a time when assets may be received on which tax will be due.

What is Joint Last to Die? James and Jane Dandy take out a $100,000 joint last to die whole life insurance policy that names their son, John, as beneficiary. James and Jane are the lives insured. James dies

at age 79 and Jane

receives no benefit from the policy.

However, when Jane dies four years later, John receives the

$1

All

00,000 death benefit.

insurance contracts are uniluteral contracts. This means that the insurance

company is the only party bound by the contract and is obliged to

fulfill

the

contract as long as premiums are paid, whereas the insured can cancel it at any time.

LESSON 3: The Definitions of lnsurance All insurance policies pay

Insurance contracts cover death, disability, health and investments in the forms

a benefit. A death benefit

of annuities and segregated funds.

is typically a lump

sum

payment. A disability

A basic life insurance policy covering death pays a death benefit (money) upon

benefit is paid as monthly income. An A&S benefit

a lump

A basic disability policy pays a specified income (the benefit) to the insured

sum

reimbursement.

the death of the life insured to the beneficiary.

is

An

annuity benefit is a

when the insured has satisfied the insurer's definition of disability.

series

of payments.

A basic A&S policy will reimburse the insured for qualified medical expenses.

An annuity contract pays a specified amount of money periodically to

an

annuitant (the person who receives the money).

An Individuql Variable Insurance Contract QVIC) or segregated fund buys the policy owner an investment with both a maturity guarantee (payable when the

conffact terminates) and death benefit guarantee (payable when the policy owner dies).

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LESSON 4: Life lnsurance Contract Requirements -\s we have seen, insurance contracts, like most contracts, require an offer and acceptance. However, life insurance contracts are somewhat different from other types of contracts because of the intervention of the Unifurm Life

Civil Code. These statutes establish that a life insurance contract does not come into effect until payment of the initial premium is made, and there has been no change in insurability between the time of

Insurance Act and the

application and delivery of the policy to the insured.

What Happens When There is a Change in lnsurability? lnsurance agent Serge Vendre has taken an application and flrst premium payment for a $200,000 whole life insurance policy from his friend Phil Saccharine. The application was foruvarded to the insurer, Hazards Ltd. (Hazards), who issued a

standard policy and forwarded it to Serge for delivery. Prior to the delivery, Phil informs Serge that he has been diagnosed as a diabetic and is receiving ongoing treatment. He further confirms the diagnosis and treatment by letter from his doctor, and says that now he is relieved to have taken out the policy when he did.

How should the parties proceed, and why?

Serge should inform Phil that the medical report has altered the risk in the insurance, and if H azards accepts it, a new policy will be issued at a higher (rated) premium. He should indicate to Phil that a new cheque will be required for the amount of the increased premium. Serge sends the original policy back to Hazards, along with the doctor's report. ln the event that Hazards accepts the risk, a new rated policy will be issued and sent to Serge for delivery. When delivering the policy, Serge must be certain that Phil signs a receipt acknowledging the new policy and receives the new cheque.

ln contractual terms, Phil's application was an offer to purchase a standard policy from Hazards, and Serge's refusal to deliver it was a rejection of that offer. lf Hazards issues a rated policy, this constitutes a counter-offer and its acceptance is acknowledged by Phil's signature on the receipt.

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The Canadian Life Insurance Course

N.B. Delivery of the policy to the insured is the step in the contractual process that signifies acceptance of the offer by the company, and binds both parties to the contract.

Other basic elements of the insurance contract include:

/ / /

legal capactU to contract a"meeting of the minds" between the parties to the contract a lawful object of the contract

a

Legal GapacitY Legal capacity means that a person is legally able to enter into a life insgrance contract. The fJnifurm Life Insurance Act states that pefsons from the age of 16 may apply for insurance on their own life and on the lives of others and have the full power to deal with the policy.

A person is not allowed to enter into a life insurance contract, exercise rights in, or deal with a life insurance policy if he or she is incompetent (persons under the age of 16 or mentally disabled). Howevet, life insurance contracts can be made on the lives of incompetents. A legally appointed representative can also act on

behalfofthe incornpetent in respect ofexisting contracts'

A minor is defined as one who has not reached "legal age," or Who ts a Minor?

"age of majority" in his or her province. Legal age is 1B years in all provinces except British Columbia, Nova Scotia, New Brunswick, Newfoundland, the Yukon, Nunavut, and the Northwest Territories, where it is 19 years.

Meeting of the Minds of Meeting of the minds means that the parties have agreed to all the details of the the contract. There can be no meeting of the minds when one or both parties has made: a mistake

misrePresentation

Mistake

when a mistake has been made about the details of a contract during its negotiation, there has been no meeting of the minds and a valid and far as enforceable contract has not been formed. Although mistakes, as mistakes contract law is concerned, can occur in several forms, only those 2-10

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which are fundamental to the intent of the contract (such as those described below) and which would have affected the decision of the parties to enter into the contract, are considered to be sufficiently serious to make the contract invalid.

What is a Mistake?

It may seem improbable that an agent could make a "mistake" in an application, but it can happen - either intentionally or unintentionally.

When Ellie Major, the agent, met with her new client, Sandy James, Sandy decided to proceed with a whole life policy with herself as the policy owner and beneficiary and her husband, Thomas Matthews, ES the life insured. When Sandy completed the application with Ellie, Ellie failed to note that Thomas's surname was different from Sandy's and he was listed in the policy as Thomas James. All other information about Thomas was correct.

Thomas died three years later and it was then that the mistake was discovered. Coverage by the insurer, however, was still provided because the fact of this mistake did not change the risk the insurer undertook when the policy was issued. This was a mistake; an error not consciously or intentionally made.

However, when agent John D'Angelo met with his prospective client, Linda Scott, it was a different matter entirely. Linda also wanted to proceed with a life policy on her spouse, Arthur McFadden. Linda requested coverage for $500,000. The application was completed for the amount of $S0,000 and the contract was drawn up for this amount. lf Arthur died, the insurer could seek to deny coverage because the mistake in coverage amount is fundamental to the intent of the contract.

Both cases show the necessity of careful preparation of the application.

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The Canadian Life Insurance Course

unilateral mistake is a mistake made by one party and may only be remedied if it is an obvious mistake recognized by the other parry' Mistakes

A

that affect both parties are called either mutual mistukes or common mistakes'

A mutual mistske occurs when a person intends to contract for one thing and the other parfy intends to contract for another. When an applicant intended to insure the life of one person and the insurer intended to insure the life of another, a mutual mistake has been made that will invalidate the contract.

Common mistakes occur when both parties make the same mistake and enter into a contract intended by neither of them. For example, where both applicant and insurer enter into a contract to insure the life of a third party, both having the mistaken belief that the pelson was alive when in fact the pemon was dead at the time that they entered the contract, a common mistake has been made that would vitiate or negate the contract.

Misrepresentation What appears to be a meeting of the minds may not be genuine if one of the parties to the contract has been induced or persuaded to enter into the contract through the misrepresentation of the other party. Life insurance contracts fraud will terminate

induced by a material misrepresentation remain in full force and effect unless and until they are invalidated. A material misrepresentation may arise from an

a contract no matter

untrue disclosure or non-disclosure'

how long the policy has been

in

force!

Muterial misrepresentation has, after much judicial discussion, been defined as "a misfepresentation of a fact such that, if the truth had been known, a reasonable insurer would have refused to issue the insurance or would have charged a higher premium for

it."

A fraudulent misrepresentation ("fraud") is a "false representation which a party makes deliberately, knowing it to be false, and with the intent of deceiving the other party to enter into the contract". The fraudulent misrepresentation must be material to the risk of the policy (that is, it is likely to affect or influence the policy risk). Fraud terminates a contract regardless

of

how long it has been in force.

An innocent or negligent misrepresentution is a false representation made without the intent to deceive the other party.

A misrepresentation can be used as a ground for terminating the contract when it is material to the risk and when the fact misrepresented was in the 2-12

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knowledge of the parly making the misrepresentation.

If

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The Law and Life Insurance

the misrepresentation

is fraudulent, there is no time limit during which the insurer may terminate the

policy. However, if the misrepresentation is not fraudulent, the insurer may void an in-force policy within two years of issue (called the "contestable period"), but not afterwards.

-\:,B. A "mistake" is not a conscious act, whereas "misrepresentation" may or may not be a conscious act.

-\lthough misstatement of age, whether deliberate or not, is not considered a ground that will allow the insurer to terminate the contract, the insurer's liability will be adjusted so that the amount of the benefit paid is equal to the amount that would be payable in return for the premium actually received, based upon the

What

life insured's true age.

is Utmost Good Faith?

The contractual concepts of mistake and misrepresentation are very important considerations when dealing with life insurance agreements since these contracts rely heavily on the information provided by the applicants. Accordingly, the acceptance of the information supplied by an applicant, at face value, is an act of "utmost good faith."

Because the information provided to the insurer has an impact on the decision to accept the application and on the premium charged, a high degree of honesty is imposed on the applicant; the applicant must disclose all material facts on the application.

If the insured misrepresents information that is material to the decision about the coverage, the insurer has the option to void the contract.

Finally, when filing a claim, all policyholders are expected to act with "utmost good faith".

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lnsurable lnterest

For a contract to be lawful, an insurable interest must exist' Insurable intercst, as a rule of thumb, exists if the death of the life insured would be detrimental or cause harm to the person taking out the insurance' In effect, the gain upon insured would risk a loss or fail to realize a benefit from a probable the death of the insured.

The lJniform Life Insurance Act, and the Quebec

civil code confirms

insurable interest exists for: the person's own

life

the life of his or her sPouse the life of his or her child(ren)

the life of anyone upon whom the person is dependent for support or education the lives of his or her emPloYees

the life of anyone in whose life the pe$on has a pecuniary interest (e.g., a guarantor)

grandchildren

Recently, the need for an insurable interest has been virtually eliminated, provided that the person whose life is insured consents to it, in writing' The broad interpretation ofinsurable interest now extends to include partners, key employees, and creditors. Only the insured need have an insurable interest, not the beneficiary, nor any assignees. An insurable interest must exist only at the beginning of an insurance contract, not at any point after the insurance has taken effect.

-^f.,61.

A policy issued with a valid insurable interest and then assigned

to

someone without an insurable interest is valid and enforceable.

In the absence of an insurable interest, insurance contracts are voidable ' A lack a of insarable interestmeans that the person taking out the policy cannot make claim against the insurer for payment of the policy benefit or receive the premium money back.

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LESSON 5: The Two Forms of the lnsurance Contract There are two forms in which a policy may be issued:

/ /

An agent has the

atemporary insurance agreement, or

authority

to

issue a

TlA. You'll learn more

the policy

about authority

Temporary lnsurance Agreement (TIA) Some insurance agents have the authority to issue a conditional or temporary insurance agreement (TIA). The agreement is issued after the agent has completed the insurance application and issued a receipt for the initial premium payment. A temporary insurance agreement puts insurance in place trn the life insured while the policy is being prepared; benveen application and final policy.

it

module 4.

bridges the gap

TIA is issued, the insurance company is at risk; if the life insured dies betbre the final policy is delivered, the insurance company is liable for pavment under the policy unless it can prove that it would not have issued the rolicy for that application. Accordingly, a TIA should not be issued if it is Once a

ruspected that the applicant is not insurable, or not insurable at regular rates.

!

More information on TIAs is found in module 3.

The Policy

.\ tontract of adhesion is the term

life insurance contract because ::e insurer draws the contract in the form that it is prepared to issue, and the ,:plicant either accepts or declines all of the terms and conditions of coverage

:irt

used for a

are set out in the contract. There is no opportunity for negotiation.

and which -he only documents considered tobe evidence of the contract ::,rm the entire contract between the insured and the insurer are the ,:sured's application (which is evidence of the nature of the insurance sought

:',

the applicant), and the insurer's policy (which is evidence of the terms and

: -,nditions of the insurance coverage).

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misrepresentation is alleged, a court will consider only these two ::,cuments. However, if a mistake is alleged, the question is whether the : . ntract has been entered into (i.e. was there a meeting of the minds), not what ,"": contract says.

If

a mistake is alleged, external evidence is allowed.

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The Canadian Life Insurance Course

in the application.

The amount, type of insufance, and premium cost are set out contradiction between the information set out in the

In the event of any

application and the policy, the policy will prevail over the application' insurance application The face puge, ot schedule of the policy as well as the components of the policy. Among other details, the

describes the basic schedule includes:

the basic Promise of the PolicY the consideration

the execution portion of the policy the effective date of the PolicY other details the Basic Promise'.The basic promise in the policy identifies the life insured, and where that amount of the insurance payable (the face amount), when amount is payable, and to whom it is payable' page

The Consideration (premium detaits):The premium details of the face the frequency and sets out the amount and method of payment, as well as the premium duration of premium payments. It also provides a breakdown of The death benefit

will not be paid if death occurs by suicide within two years of the

when riders are attached to the policy.

of Execution Portion: The execution portion of the policy confirms the date when signed by issue of the policy, not the effective date of the contract, and officers of the insurance company, finalizes the contract of insurance.

effective date.

the policy Effective Date: The effective date of the policy is the date that go into effect until it has takes effect and coverage starts. The policy does not paid, and it has been delivered to the insured, the initial premium has been insurability of the life been determined that there has been no change in the and the policy insured between the time the application was received and, in some cases, delivered. The policy owner must sign a delivery receipt in force' the agent witness the signature. At that point, insurance is 10-day After the policy has been delivered, the policy owner has a statutory During this period to consider the contract. This is called the rescission period' the policy and period, the policy ownef can decide to cancel - or rescind receive a refund of the premiums paid'

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LESSON 6: Elements of the lnsurance Contract The Uniform Life Insurance Act specifies that every policy must clearly indicate: the name of the insured the name of the life insured

the amount of insurance money to be paid and the conditions for its payment

the amount of the premium and the grace period for any premium payment the conditions for reinstatement if the policy lapses

whether the policy is a participating policy (i.e. the insured receives dividends from the insurance company) Provisions in the contract that define and, in some cases, protect the rights

of

rhe policy owner include:

/ / / / / / /

suicide exclusion clause conversion privilege age adjustment

premium payments loans reinstatement privilege

incontestability clause

Suicide Exclusion Clause l-his clause says that if the death of the life insured is caused by suicide, :.rnrmitted beyond a period of time (generally two years) after the policy was -;'ued or reinstated, the insurer must pay the face value of the policy. If, :.lr\\.ever, the death by suicide takes place within the excluded time period, ::en the insurer must return any premiums that have been paid, without -:terest.

)onversion Privilege

l:is

clause allows convertible term insurance policies as well as policies with

::=mr insurance riders

to be

converted

to permanent life insurance without

of insurability. The conversion must usually occur before a certain -': or date, and the new premium will be based on the standard rate for the - rrrent age of the life insured. .'. idence

:

Convertible policies and term policy riders are covered in module 6.

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Age Adjustment This clause deals with situations where the age of the life insured has been misstated (incorrectly given). Although misstatement of age, whether deliberate or not, is not a ground that will allow the insurer to void the contract, the insurer's liability

will be adjusted

so that the benefit is the amount

that would have been paid based on the premium actually received and the life insured's true age.

Premium Paymenfs The initial premium must accomp any the application, while subsequent premium payments act to keep the policy in effect. Insurance premiums are paid either: monthly, A policy will

lapse

if the premium

is

not paid before the end of the grace

quarterly, semi-annuallY, or annually.

period.

These payments have a grace period (usually 30 or 31 days following, but not

including the premium date), during which the policy remains in full force.

Except for group insurance, premiums may be paid by the policy owner, life insured, an assignee of the policy, a beneficiary, or a person (other than a life insurance agent) acting on behalf of anyone of these.

Reinstatement The reinstutement clauses in the policy are designed to assist when a life When the

policy lapsed,

has

it can

be reinstated

within two years.

insurance contract lapses due to premium non-payment. When this occurs, the insured may apply to the insurance company for reinstatement of the contract

within two years of the lapse. To reinstate the policy, the owner must pay all overdue premiums, any indebtedness (including interest charged on the unpaid premium), and provide evidence of insurability to the satisfaction of the insurance company. If, and when the contract is reinstated, both the two-year contestability and the two-year suicide exclusion periods begin anew.

Loans This provision sets out the parameters within which the policyholder may or may not borrow money from the insurance company from the cash surrender value of the policy. Thus, this provision will not exist in contracts for term insurance since term insurance does not provide a cash surrender value.

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lncontestability Provisions in the Uniform Life Insurance Act and Civil Code intrude into the law of contract by introducing incontestsble claases into insurance contracts.

An incontestability clause means the insurer cannot contest or fail to pay the death benefit when the life insurance contract has been in effect continually for two years after its issue or reinstatement date. The contract is contestable only when it is voidable on the grounds of material misrepresentation.

These clauses are ineffective where the insurance company alleges that the contract was void from the outset; for example, because there was no insurable interest.

Finally, incontestability does not apply when specific terms of the contract are in dispute. For example, the insurer coUJd resist a disability claim at any time on the basis that the claimant did not meet the definition of "disabled" in the r'onftact.

Non-Standard Elements of the Gontract Other provisions that may appear in life insurance contracts include:

,/ { { { { / /

the designation of beneficiaries

non-forfeiture options and tables ofnon-forfeiture settlement options

protection from creditors insurance of minors impact of divorce assignment

Desig n ati on of Be n ef i ci a rie s

fb

beneficiary of a life insurance policy is designated in the application. A

meficiary

can be:

the insured's estate a person or persons

Remember: there

a class of persons

are six types of

a business

beneficiaries.

a tnrstee a minor

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The Canadian Life Insurance Course

N.B.

beneficiary when the contract is being drawn up and then, regularly review who has been I appointed to see if a change should be made.

It is important to select the most appropriate

The Estate as Beneficiary: If the estate is designated as the beneficiary of the insurance proceeds, the policy owner directs the disposition of the proceeds in his or her will. While naming the estate as beneficiary increases the amount

of probate fees that will have to be paid and does not provide

creditor

protection of the proceeds, the proceeds may be used to provide liquidity for estate costs and/or taxes, for cash bequests, or to be held in a trust on behalf of a

beneficiary.

A Person aS Beneficiary: A person who is designated as the beneficiary can be named as a fevocable or itrevocable beneficiary. A revocable beneficiary means that the policy owner may change the beneficiary named in an insurance contract at any time, in writing. If the beneficiary is irrevocable, the beneficiary must agree, in writing, to a change. Moreover, the consent of the irrevocable beneficiary is required for the policy owner to surrender the policy for cash, borrow against the cash value of the policy, or to assign the policy.

So,

if the policy owner designates an irrevocable beneficiary, the contract is, in

effect, controlled by the beneficiary.

a beneficiary as irrevocable in a policy' the term "irrevocable" must be used in the application or in a declaration to the insurance company; this cannot be done in a will. In Quebec, the spouse is automatically considered to be irrevocable unless otherwise stated on the

In order to

designate

application.

The insured may also name a contingent beneJiciary. This is a beneficiary who would receive all or part of the insurance proceeds if the primary beneficiary is not living at the time the life insured dies.

If a beneficiary for insurance proceeds is named in a will, and a latet declaration names a different beneficiary for insurance proceeds, the beneficiary named closest to the death of the insured willprevail.

a life insured and beneficiary die together or within 30 days of the same event, it is assumed that the beneficiary has died first. This allows the insurance proceeds to be paid to the estate ofthe insured and to be disposed of according to the instructions in the will. If no will exists, the person is said to

If

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Module

2:

have died intestste and the disposition of the insurance proceeds according to the law of intestacy.

A Class of Persons as Beneficiary: It is persons as beneficiary so that

The Law and Life Insurance

will

be

appropriate to name a class

of

all members of the class are able to

receive

proceeds without one, or more, being inadvertently left out. An example of this

is a grandparent naming "the

grandchildren" as a class. Thus, if more grandchildren are born after the contract is issued, the contract does not need to be updated to reflect this change.

A Business as Beneficiary: A

business

is named as beneficiary when

insurance is put in place on the lives ofshareholders in a business, partners, or

the life of a key peruon in a business. Insurance funds allow for an orderly t-rnancial transition in the event of death.

A Trustee as Beneficiary: It is appropriate to name a trustee as beneficiary '.r'hen proceeds are to be managed by a trustee for the benefit of another person or persons, such as on behalf of a minor or a person who is mentally rncompetent.

C/asses of Beneficiaries

The four primary classes of beneficiaries were altered by legislation in 1962.

Prior to July 1, 1962, beneficiaries were.

Beneficiaries for Value Preferred Beneficiaries Ord inary Beneficiaries

Estate Beneficiaries Since July 1, 1962, beneficiaries are: I rrevocable Beneficiaries Revocable Beneficiaries Estate Beneficiaries

The beneficiary for value designation was designed to provide a creditor with collateral in the policy, plus interest. Today, this type of assignment is called a collateral assignment.

A preferred beneficiary (a spouse, child, grandchild or parent) designation placed the benefici ary in control of the policy.

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The Canadian Life Insurance Course

Although this designation has disappeared, it has been replaced in many ways by the irrevocable beneficiary designation.

An irrevocable beneficiary has control over the policy. Obtaining a cash loan, surrendering the policy for cash or assigning the policy for collateral is denied without the written consent of the rrevocable beneficiarY.

i

Finally, the "ordinary benefici ary" designation was changed to "revocable benefici ary". This beneficiary may be changed by the policy owner without the benefici ary' s consent.

An estate beneficiary was, and continues to be, the designation of the policy owner's estate as beneficiary.

A Minor as BenefiCiary: A minor who has been named

as a beneficiary can,

at the age of majority, receive insurance proceeds. If the beneficiary has not attained the age of majority, the proceeds can be paid into court or to a designated trustee, for the benefit of the minor. a minor has been named as an irrevocable beneficiary, he or she cannot consent to a surrender ofthe policy until he or she has reached the age

However,

if

of majority in the province of his or her residence.

re O Pti o n s Non-forfeiture options are available through permanent life insurance only' The options give the policy owner access to the cash surrender value of the policy by an automatic premium loan (APL), extended term insurance (ETI), N o n - F o rfe itu

or reduced paid-up insurance (RPU).

E

Non-forfeiture options are covered in module 6.

Tables

of Non-Forfeiture

These tables assist policy owners in calculating the value of the non-forfeiture options in the contract over, at least, a Z}-year period. Using the tables of non-

value of forfeiture, the policy ownel is able to determine the cash surrender the policy, andlor the cash equivalent value in the policy that may be applied towards the options.

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Module

Settlement Options The life insurance contract

is "settled" when the life

2:

The Law and Life Insurance

insured dies. The

;ettlement options available to the beneficiary(ies) include:

-

a lump sum payment

an interest option an installment option a

\.8.

life annuity option

The settlement option may be chosen by the policy owner. has not been specified, death of the

it

If

an option

may be selected by the beneficiary upon the

life insured.

--mP Sum payment: This is the form of payment most people assume they ,',.i1 receive on death of the insured. It is payment by cheque of the face :::.runt to the beneficiary. When the insured has considerable last expenses, it

' ::sential to select this settlement option so that these expenses

can be paid.

-:erest Option: The interest option may be suitable for a beneficiary who has . i:3r resources to meet immediate cash needs. Selecting this option means that :---: lnsurance company invests the proceeds and pays interest on the proceeds

-::,ilarly (e.g., annually), at a guaranteed minimum,

as long as the proceeds

i;:,'. u'ith the company.

-stallment Option: The installment option may be suitable for the :'':eticiary who needs a steady income over a number of years. It provides a :.:porary income. Selecting this option means that the proceeds plus interest :"': paid to the beneficiary over a period of years. The installments may be :::ietermined by a time period, e.g., 10 years (also called a fixed period rtrtrrl). or an amount of money, e.g., $500 per month (also called a fixed :"-.-runt option), until the proceeds are exhausted.

--e Annuity Option: Selecting

this option means that the insurance company

.-..:' the proceeds as a single lump sum premium to purchase a life annuity for "- s leneficiary. Thus, a permanent income is provided. The policy owner or

:"::r-ficiary can choose from among the five types of life annuities. i- it-e

annuities are covered in module 10b.

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The Canadian Life Insurance Course

Protection from Creditors During the lifetime of the policy owner, creditors cannot claim the cash surrender value (CSV) of a policy when an irrevocable benefrciary has been named or the revocable beneficiary named is the spouse, child, grandchild, or parent of the policy owner. These beneficiaries are sometimes called "preferred" beneficiaries.

When the beneficiary is the estate, proceeds of a life insurance policy do not enjoy

creditor protection.

E Creditor protection is covered in module 6.

lnsurance of Minors The r-Jniform Lfe Insurance Act, applicable in all provinces except Quebec, states that persons from age 16 may apply for insurance on their own life and on the lives of others and have the full power to deal with the policy. lmpact of Divorce Except in Quebec,

if the spouse of the policyholder has been named

beneficiary and the parties subsequently divorce, the divorce does not alter the

rights of the former spouse as beneficiary. A new beneficiary can be named following the divorce, unless the former spouse had been designated as an

In

Quebec, a divorce or marriage annulment automatically cancels the appointment of a spouse as a beneficiary. irrevocable beneficiary under the policy.

lf a married couple has a policy in which one is the policy

When a Couple Sepa rates

owner and the other is the benefici ary, the policy owner might be less than motivated to continue premium payments if the couple separates, even though obliged to do so by the terms of a separation agreement and/or divorce. lf the premiums are not paid, the beneficiary spouse can suffer if the policy lapses.

The beneficiary spouse will need to monitor payments and to do so, the policy owner should be obligated by the terms of the same separation agreement and/or divorce, to instruct the insurer to send duplicate copies of the premium notices to the beneficiary.

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Module

2:

The Law and Life Insurance

Assignment

in a change of

control over a life insurance policy.

Assignments of life insurance policies may be made to another person, a charitable institution, or corporation. They are subject to both the laws of the province and the terms of the contract. Filing a notice of assignment with the head office of the insurer makes an assignment.

Assignments result

Policy ownership includes the rights to: enter into a contract name the beneficiaries

modifi' the contract within the policy in the form of loans or withdrawals terminate the policy, which can be done on a unilateral basis access the value

assign the policy on a collateral or absolute basis

For

a collateral

assignment

-\n absolute assignment transfers all of the rights of the original policy owner, including the right to appoint a beneficiary, to another party. .1 collateral assignment is when a

to be

there must be expectation

made, an

of profit.

policy is assigned to a financial institution

for a loan in which there is an expectation of profit to be earned. Thus, e policy cannot be assigned for personal reasons. The lender owns the policy to ihe extent of the debt, and in some ways has control over the policy. The policy owner must ensure that the policy is kept in force by maintaining the premium payments, and usually the insurance company is obliged to inform as security

:Lre lender

if

the policy owner defaults on any premium payments. This

will

ellow the lender to keep the policy in place by making the payments on behalf .''lthe policy owner and adding them to the outstanding debt.

\\len

making a collateral assignment of a policy, the policy owner must 3nsure that it contains no preferred beneficiaries (i.e. spouse, children, ;randchildren, and parents of the policy owner) if the policy was written prior

:.''

July l,1962, or any irrevocable beneficiaries if written since that date.

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The Canadian Life Insurance Course

LESSON 7: lnsurance Offences and Remedies however, the In canada, the power to make criminal law is exclusively federall and civil provinces have the right to designate offences related to property dealing rights. under this umbrella, a number of provinces have provisions of prices, with unfair or deceptive trade practices. These include the inflating schemes' taking advantage of l,ulnerable consumers, and suspect telemarketing code, Although these offences are less serious than those under the criminal three years. fines can be as high as $100,000, with imprisonment of up to

Fraud, Forgery and Theft

Generally, fraud is any misrepresentation of a material fact, made knowingty and with the intent that another person (or legal entity) will rely on it and suffer financial injury as the result.

Fraud within the insurance industry can work in many ways. lt is possible for the insured to defraud (i.e. commit fraud against) the insurance company and the agent, or the agent to defraud either the customer of the insurance company.

Forgery

is very similar to fraud in that it is also a

misrepresentation. Forgery of a document or another person's signature is an act of deception with the intent that another person or entity will rely upon the authenticity of the document or signature and suffer a financial injury as a result. premiums Finally, theft may also occur by the agent who steals or the policyowner who makes a false claim'

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Module

2: The Law and Lrfe Insurance

The FIow of Insurance Fraud

Insurance Agent

lnsured

Erample:

rr

if

an insurance agent uses an advertisement that promotes a product

service and which contains a representation to the public that is materially

::!se or misleading, the conduct of the agent may run afoul of the misleading ,,lr'ertising provisions of the federal Competition Act. \.[t-rreovâ‚Źr, as agents are fiduciaries (that is, they occupy positions of financial

::-rst). failure to pass on policy owner premiums to their company or tb .rnropriate these funds for their personal use could constitute embezzlement,

:: -

Criminal Code, andlor commingling which, in itself, is an jurisdictions. in most

Lrffence under the

=nce

i

\l""'st provinces require agents to have eflors and omissions insurance in ::ier to protect the agent, the insured, and the insurer from fraud. In Ontario, :

::

instance,

:rrr-rrS

in addition to the required $2 million

Errors and omissions protects

loa

!

aggregate coverage for

and omission, every agent must include extended coverage for

":-'udulent acts. Agents should be aware that acts that contravene provincial :::.rcal or professional standards could lead to suspension or revocation of their

in!'e and/or fines, while contravention of applicable sections of the Criminal - :de may result in criminal charges, and if convicted, fines and/or terms of :

:::risonment may be imposed.

',|-ie details on the standards that apply to '':-;iary

insurance agents including

duty and fraud are provided in module 4.

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The Canadian Life Insurance Course

A Case of Theft, Fraud and Forgery Bob Bogus, an agent for Rock of Ages lnsurance Limited takes a life policy application and first premium payment for $1 million of whole life from his client Joe lnocenti. Bob deposits the premium payment into his personal bank account, photocopies a Rock of Ages whole life policy, forges the signatures of the two officers of Rock of Ages on the copy, puts the copy into a leather folio, and delivers this "policy" to Joe. Joe dies before the next premium payment is due, and Norma lnocenti, his grieving widow and the beneficiary named in the policy, looks to Rock of Ages for payment of the million-dollar death benefit. Rock of Ages denies coverage, and Norma, after consulting a lawyer, sues both Bob and Rock OfAges.

The Law Suit (Civil LiabilitY) Norma alleges that the company should be bound by the acts of its agent Bob, who was acting within the express and/or apparent authority of the insurance company. Besides, how was her dear departed husband to know that the policy was a forgery?

Rock of Ages pleads that they are not bound to pay the benefit; that the policy is a forgery, about which they know nothing, there was no consideration (they received no premium payment) and further, that Bob's acts went far beyond any authority granted, express or implied.

It seems likely that a court would find that the policy was a forgery and that Bob's actions were fraudulent against both the client and

the company. lt would further find that Joe would have no way of knowing that the policy was invalid because Bob was acting with the apparent authority of Rock of Ages and therefore, the company would have to honour the policy. Even if the court found that Rock of Ages was not liable for the coverage, Norma could

make

a

successful claim from Bob's effors and omissions

insurance carrier based upon his fraudulent acts.

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2:

The Law and Life Insurance

lf

Rock Of Ages honoured the policy, the company could successfully look to Bob to repay it the million dollars paid to Norma, or Rock Of Ages could successfully collect from the carrier of Bob's errors and omissions policy.

Prosecution (Griminal Liability) Bob's civil liability to Rock Of Ages and Joe may well pale in comparison to his exposure to criminal charges that would undoubtedly arise from his conduct.

He has committed an act of forgery in order to perpetrate the fraud against Joe, and has committed theft of the premium monies that were clearly the property of Rock Of Ages.

lf the criminal court finds that Bob committed these crimes (theft, fraud and forgery), he could be sentenced to serve time in jail, and to pay substantial fines, or both.

The Remedies for Disputes Over lnsurance Contracts i:bject to the limitations imposed by incontestability clauses, all parties with :riputes arising from insurance contracts may resort to the courts for a judicial -;solution. However, most jurisdictions have created the office of the lnsurance ombudsman that offers consumers an informal, cost effective, last i :p tbrum for resolving disputes arising from all forms of insurance conftacts,

:-:t,. property,

casualtS/, travel, health, and

life insurance. Generally, using the

:':l;e of the Insurance Ombudsman is a four-step process:

1.

Consumers begin the process

by lodging their complaint with their

own insurance company; their insurance agent should be able to give them the details on how this is done. Most insurance companies have appointed an Ombudsman Liaison Officer to oversee this complaint process.

If the consumer is not satisfied with the response from the insurer, he or she should request a Ietter from the company that clearly sets out its final position on the complaint.

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The Canadian Life Insurance Course

3.

The consumer should then write to the Insurance

Ombudsman,

enclosing a copy of the letter from the insurance company that sets out its position in the matter. The letter should clearly set out the nature of the dispute, and why he or she disagrees with the position of the insurance company.

4.

The office of the Insurance ombudsman then attempts to resolve the dispute, and provides the consumer with the contact information of the officer who will be reviewing it. When the review is complete, the consumer is sent a letter that sets out the findings of the Ombudsman, and although these findings are not binding on either party, they can be persuasive. In the event that the findings are unacceptable to either party, the consumer may pursue the matter through the courts'

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Module

2:

Take time

The Law and Life Insurance

to

memorize all these

key points; you may find

some

of them on the exam.

Module 2: Summary of Key Points

Fraud

is

intentional deceit.

lt

terminates

a

contract

irrevocably.

A TIA puts insurance in place while the contract

IS

prepared; it is a temporary policy that binds the insurer to the insured.

The policy goes into force when it has been delivered to the insured, the first premium paid, the policy receipt is signed by the insured, and it is witnessed by the agent.

A suiclde exclusion clause says that if the life insured commits suicide beyond a specified time period ( usually 2 years) after issue or renewal of a policy, the insurer pays the face value of the policy.

The age adjustment clause states that misstatement of age does not allow the insurer to void the policy, but rather to readjust the death benefit to an amount that would have been paid based on the premium actually received and the true age of the life insured.

The incontestability clause states that the

contract cannot be contested by the insurer (in the absence of material misrepresentation), when it has been in effect continually for a period of two years after the issue or reinstatement date

The policy owner has a grace period of 30 or 31 days following the premium date in which to pay the premium. lf the premium is not paid, the policy lapses. The policy owner then has a period of two years to reinstate the policy. He or she must pay outstanding premiums, any interest owed, and provide evidence of insurability.

When the estate is named as beneficia ry, there is no creditor protection of the proceeds of the policy.

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The Canadian Life Insurance Course

The contract is "settled" at the death of the life insured.

Setflement options may be chosen by the policy owner, and if not specified, may be selected by the beneficiary' Setlement options include lump sum payment, interest option, installment option and a life annuity option.

A collateral assignmbnt transfers the policy as security for an investment or business loan.

Errors and omissions insurance is a requirement for agents.

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2b THE LAW AND LIFE

Ca,se Studies'NSURANCE: This module describes some scenarios you might encounter as a life agent and how the standard

c

on tr act

provi sions apply.

ln this module:

This gives you

a

chance to

put theory into practice!

Reading

the case studies

is

an essential part of the

LESSON 1: Right of Rescission

c0urse.

LESSON 2: Entire Contract LESSON 3: Suicide Exclusion LESSON 4= lncontestability LESSON 5: Grace Period LESSON 6: Reinstatement LESSON 7: Smoking Status LESSON 8: Misstatement LESSON 9: Settlement Options LESSON

1

0: Fraudulent Misrepresentation

Some Key Terms to Know is a

fraudulent misrepresentation :rtended to cheat or deceive. Fraud is only

"fraud: ;

rnsidered

a criminal offence

when

-,-,nlrnitted by the agent and, thus, can have

grace period: 30 or 3T days after the date

the premium

is due during which the

policy remains in full force before lapsing due to non-payment of a premium.

eqal ramifications. When committed by the

,iplicant or the life insured it can result in ::.i policy being terminated by the insurer; -.-'l\'e\-er, it is not a criminal offence.

incontestable cluuses: clauses that state that

a life insurance contract is incontestable by the insurer when it has been in effect continually for two years after the issue or reinstatement date.

The Canadian Life Insurance Course

muteriul misrepresentution: a misrepresentation of a fact such that, if the truth

had been known )

a

reasonable insurer

would have refused to issue the insurance or would have charge a higher premium for it.

rescission: the right to cancel the policy within ten days of acknowledgrnent of receipt of the policY. settlement options: the options available to

the beneficiaries to settle the

contract

when the life insured dies.

misstatement

of uge: when the age of

the

life insured has been misstated, the insurer may not void the contract but adjust the benefit to afi afnount that would have been received based on the premium actually paid and the true age of the life insured.

This is a material misrepresentation-

smoking status.'

see

fraud

suicide exclusion: suicide is excluded as a cause of death for which the death benefit is paid if it occurs up to two years after the policy is issued.

clause in the policy designed to assist when a life insurance contract lapses due to premium non-

reinstutement:

a

payment.

For all the key terms for this, and all modules, please see the Glossary at the beginning of the book

2b-2

Module

2b:

The Law and

Lrf, Insurance

LESSON ONE: Right of rescission Gerald Cook was at home one Saturday morning while his wife, Martha, was out shopping. He read an article in his daily paper that did a tremendous job explaining the benefits of life insurance. So as not to procrastinate, he looked up a life agent, Claire Mackinnon, in bis local Yellow Pages and made an appointment with her for the following Wednesday evening.

When Martha returned from shopping, she and Gerald wasted no time in getting at the weekend chore list; Gerald forgot about his appointment with Claire.

On Wednesday, Martha was at her exercise club when Claire came to meet with Gerald.

They discussed all the pros and cons of different policy types, and Gerald decided to purchase a term policy primarily as mortgage insurance.

-

By the time Martha got home, Gerald was in bed. Next day, he left for work at 6 am while Martha still slept. He failed to inform Martha of his insurance application.

On Sunday, Martha was reconciling her bank statement from the automated banking machine. She saw a cheque had cleared for $90.90. She had no record of such a cheque and asked Gerald if he knew about it. Gerald informed Martha that the cheque was the initial premium to accompany his application for the term policy.

Martha reminded George that they did not need personal policies because they were both members of a group plan at work and that the group insurance included ample life coverage. The next day, when Claire returned with the policy for Gerald to sign, Gerald cancelled his contract and received his $90.90 using his right of rescission. l.J.B. The right of rescission lasts for 10 days.

LESSON 2: Entire contract On July 18 last year, Margaret Murdoch passed away in her sleep. She was 93 and had had a whole life policy put on her life by her husband when she was 40. The

beneficiaries of the policy were their children, Carol and David.

Carol found the policy when she was clearing through Margaret's things. The death benefit set out in the policy was $100,000 which would come to her and David tax free.

Carol filed a claim with the insurer and within 3 weeks received a cheque for $10,000.

2b-3

The Canadian Life Insurance Course

and premiums had The company claimed that the policy application was for $10,000 policy was $100,000 was been paid on that basis. The fact the sum insured on the erroneous; they refused to make further payment' in the policy' carol and David sued the company for the balance of the death benefit

contract' A mistake The court considers only the application and the policy as the entire of the application' Thus' had been made, but the facts of the policy prevail over that Carol and David were able to receive the $100,000' is and the policy are the only evidence of the contract' when there policy prevails' a discrepancy between the two, the information in the

N.B, The application

LESSON 3: Suicide Exclusion 12 last year' Edgar Life agent Claire Mackinnon met with Edgar Poe on November likely he seemed well established with a lovely home and happy family so it seemed of his premature would be considering life insurance as income protection in the event death. policy, nonSomewhat surprisingly to claire, Edgar decided on a one-year term rider' For all intents and renewable, with a $2 million face value and an accidental death designated his wife purposes, Edgar was covered with $4 million in life insurance. Edgar his application' as beneficiary. He paid the annual premium, $3,760. with

when his car on January 10, Edgar's wife called claire to inform her that Edgar had died the circumstances of crashed into a tree. claire contacted the authorities to determine and Edgar had been the crash: it was a beautiful sunny day, clear driving conditions, the accident as driving his small compact instead of the SUV. The police declared intentional and Edgar's death suicide' company returned There would be no death benefit from the policy and the insurance the premium to the widow. paid within a specified N.B. The suicide exclusion clause prevents a death benefit to be premium is period, usually two years, when the cause of death is suicide' The returned.

2b-4

I

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2b:

The Law and

Lrft Insurance

LESSON 4: lncontestability Early in 1996, a perfectly healthy, 35-year-old Joe Bicker, applied for, received and paid premiums on a straight whole life policy, issued by Covert Casualty Limited (Covert).

The policy, with its $1 million death benefit, listed his wife Constance as the beneficiary.

His application correctly listed his age, occupation, and smoking status. The application did not reveal, nor did it specifically ask for the fact that Joe's grandfather, father, and

older brother had all died of heart failure before reaching the age of 40.

True to Bicker form, Joe died of heart failure at 39, and Covert sought to deny coverage on the basis that the family medical history was not included in the application.

Constance Bicker brought a successful suit against Covert by invoking the i ncontestabi I ity provision.

Since the failure to go into family medical history could hardly be viewed as a material misrepresentation, Covert had to honour the coverage under the policy.

N.B. A life insurance

contract is incontestable by the insurer when it has been in effect continually for two years after the issue or reinstatement date, unless fraud has been committed.

LESSON 5: Grace period When John Parker decided to take a four-week holiday last April, the last thing he thought aboutwas his insurance policy. The policy had been in force for 14 years, and he had always paid his premiums with every notice.

Four days after he left on his holiday, his premium notice arrived. The due date was one week before John was scheduled to return home.

Once home, John tackled the stack of mail awaiting his attention and found the premium notice. He was horrified to think that his policy had terminated for lack of premium cayment. Luckily for John, the 31-day grace period provided 31 days after the due date for the premium to be paid during which time the policy remained in full force.

2b-s

The Canadian Life Insurance Course

payment plan to ensure his After paying the premium, he switched to a preauthorized premiums would be paid in his absence'

N.B. The grace period can be 30 or 31 days after the date the premium is due'

LESSON 6: Reinstatement takes the Let us continue the story of John Parker (above), only in this case John which of premium notice summer off to explore the Yukon. on his return, he finds his and confirmation that his course has remained unpaid during his extended absence

-

-

policy has laPsed. pay the overdue John immediately reapplies for reinstatement of his policy' He must premium and provide evidence of insurability' Fortunately, his health had not The insurer agrees to deteriorated significantly since he first applied 14 years previously. period and two-year reinstate the policy. He again faces the two-year suicide exclusion policy. contestability period because this is required in a reinstated any IV.B. To reinstate the policy, the owner must pay all overdue premiums, lf, indebtedness, and provide evidence of insurability to the insurance company. the twoand when the contract is reinstated, both the two-year contestability and year suicide exclusion periods begin anew'

LESSON 7: Smoking status policy' lncluded in Tommy Hofflinger recently received the renewal package for his auto only requirement was the material was an invitation to buy term life from the insurer. The They would deduct for him to complete a brief application and return it to the company' the premium ($32.15) from his account monthly' and declared Tommy filled in the application and requested $50,000 in term coverage white lie himself a non-smoker. As far as Tommy was concerned, it was a little - and, as beneficiary' anyway, he was going to quit next year. He named his partner, Frank,

form of pneumonia' The Six months after the policy was issued, Tommy died from a rare autopsy results declared Tommy as a smoker'

2b-6

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Module

2b:

The Law and Life Insurance

Tommy's declaration that he was a non-smoker was more than a litfle white lie. lt was a fraudulent misrepresentation, a serious offence in the life insurance application process, and his application deemed fraudulent. Frank's claim as beneficiary of the policy was denied on those grounds.

N.B. A false declaration of smoking status is one example of a fraudulent misrepresentation. lt is an intentional effort to defraud the insurer. Fraud is a basis on which a policy can be denied.

LESSON 8: Misstatement of Age Jacques Bennie decided that, so far as the outside world is concerned, he would remain 39 forever. when he turned 42,he applied for and received a standard rated 9100,000 whole life insurance policy in which he named his trusted employee, Rochester, as beneficiary. His application stated his age as 39. when Jacques died at age 70, the lnsurer became aware of the misstatement of age. when the policy was issued, Jacques, assessed as 39-year-old, was charged a premium of $25 per $1,000 of insurance. Had he been assessed as a 42-year-old, his premium would have been g27 per $1,000 of insurance. What benefit will Rochester receive?

The calculation is: premium charged + premium that should have been charged x face value of the policy. Therefore, Rochester will receive . 23 + 2T = 0.9259 x $100,000 = s92 ,592.59

LESSON 9: Settlement options Ron Richardson has a $100,000 term life policy that names his only child, Roger, as beneficiary. which of the four setflement options is most suitable for Roger?

Lump sum payment This option suits Roger if Roger has a need for immediate cash and the financial responsibility to dealwith a sudden windfall. The principal ($100,000) is paid in one payment.

lnterest only This option suits Roger if he is the type to spend the lump sum of money on two jet-skiis, a new 4x4, and the rest at the local watering-hole. lt provides many small payments

2b-7

The Canadian Life Insurance Course

payments will last as long as the proceeds stay instead of one large one. The interest

withtheinsurerinsteadofarrivinginalargepayment. good one if Roger was independently wealthy On the other hand, this option is also a cash' and had no immediate need for a lump sum of

lnstallment prospects for earning an income, this lf Roger was a special needs child who had no would provide an income to Roger until the option that pays both interest and principal basis than interest onlY. principal was exhausted. lt pays more on a regular Life annuitY uses the $100'000 to purchase a Using this option means that the insurance company a permanent income which is suitable if life annuity for Roger. Roger will again receive he has need for a steady payment over his lifetime'

LESSON 10: Fraudulent misrepresentation DavidSmeehasbeendiagnosedwithprostatecancer.Thedoctorinformshimthatheis

has no insurance, immediately applies for likely to live five years, maximum. David, who that he has cancer' when he dies' a 10-year renewable term policy. He does not reveal

nineyearsafterdiagnosis,medicalrecordsrevealtheexistenceofthecancerpriorto David's aPPlication'

i

of fraudulent mis' The insurance claim is denied because of the evidence application to be false' and with the representation. David deliberately, knowing his fraudulent representation' Fraud will always intent of deceiving the other party made a years it has been in force' void a contract regardless of the number of

N.B. An innocent or negtigent misrepresentation is a false representation without the intent to deceive the other party'

2b-8

made

Underwrlting and Claims lntroduction ':'u-u receive a telephone

call one day from a client you have known for

:rn)'years. He tells you that his mother has died. He also tells you that :.:' t-ather found a life insurance poliiy taken out by his wife and issued

:i ::

vour company before his parents were married. The beneficiary of policy appears to be her sister. Your client asks you to help him ':ni'the nature and terms of the policy on behalf of his father.

:

delighted to be able to help and when you check, you hnd the :'. -:cv was a term policy when it had been issued but had been - -:'','erted later to a whole life policy. Unknown to your client's father, i:' '.r'3S named beneficiary of this policy and would be entitled to receive ,---,: rubstantial death benefit. :,"r are

':

: -: instruct your client to gather together the policy with the necessary -i:'::ls to enable the claim to be processed quickly. Your client and his :ir.--:r are very pleased with the service you have provided. You lr-,riNt?nd that what you have accomplished is the end result of the u:,:lnvriting and claims process the focus of this module.

-

The Canadian Life Insurance Course

ln this module: LESSON 1: The Application for lnsurance LESSON 2: Agent Responsibilities During Application LESSON 3: Underwriting LESSON 4: Reinsurance LESSON 5: Claiming lnsurance Policy Benefits LESSON 6: Glaiming Government lnsurance Benefits

Some Key Terms to Know claimant: the person or legal entity that is claiming the benefit from a

life insurance policY.

net death beneJit: the face value of

the policy plus any extras the policy owner may be entitled to receive.

co-insurance

factor: a Percentage

of the costs that the insured

PaYs.

deductible: an amount the insured pays before payment is received

reinsurance: part of the risk that is passed along to a reinsurer: if the retention limit is exceeded. substandard risk: a tatrng assigned

from the insurer.

to some life exclusion rider:

a rider

that

aPPlicants

underwriting.' premium: the net Premium of a policy plus the expense load.

mortality rates: the number of

the

Process of

assessing and classifYit g the potential degree of risk that a proposed insured rePresents to an msurance

company.

people expected to die at a given zga, based on 1,000 PeoPle of the same age.

For all the key terms for this, and all modules, please see the Glossary at the beginning of the book.

3-2

\ I

are

at high risk for some reason.

excludes some coverage. gross

who

Module 3: Underwriting qnd Claims

LESSON 1: The Application for lnsurance The insurance process includes three basic steps: the application for insurance an assessment of the application by the insurer a claim for the benefits of the inswance that the insurer honours

The Application for lnsurance As shown in the scenario that begins this module, it is important that all details and information on the application form are complete and accurate. When death occurs,

it is obviously

a time

of sorrow and grief. The life agent is able

to support the bereaved by helping obtain the death

benffi (that is, the money

life insured) easily and quickly from the insurance company. To achieve this goal, it is essential that everything is in place so that lhe death benefit will be paid as expected. Having "everything in place" begins

due upon the death of the

'* ith the correct completion of the applicatioh form.

\11 applicants

for life insurance must complete a detailed application form.

The form itself contains three general areas for completion: personal information

medical information product details

\.8.

Remember that the insurance company

will

use the information supplied

in the application form when deciding whether to accept the risk as applied for, reject the risk, or rate the risk with conditions, including rated premiums or an exclasion rider.

::'sonal lnformation -'-: epplicant becomes the policy owner when the policy is issued, and must :n-'"rde information that supports "ownership" of the policy including the rfrilir.r' to pay premiums. The information about the proposed life insured has r j.i3e-t bearing on the premium, which, if the application is accepted, will ;r,r,i . Some of the details about the life insured that directly affect premiums J^

his or her true age, since the older the insured the higher the premiums oender, since men have a higher mortality rate than women

-

u-hether the insured smokes (smokers have a higher mortality rate than

non-smokers). A premium discount rate is often offered to adults who have not smoked during the 12 months prior to the application.

-

hazardous occupations and/or hazardous activities

aa

J.J

The Canadian Life Insurance Course

places Health insurance such as a disability income replacement policy stability, and considerable weight on the details of an applicant's motivation, claims history.

to Motivution is determined as the readiness the applicant is likely to display trained fetum to work afler a claim; those who are highly educated or better have higher levels of motivation.

StabilitJ,

is

measured

in both the applicant's occupation (how long the in that occupation or for the same employer) and

applicant has worked residency (how long he or she has lived in the same location).

Cluims history is the number and frequency of prior claims'

Medical lnformation Medical information is perhaps the most important section when assessing life risk. The questions relate to the medical history of the life insured and the who insured's family to enable the undetwriters (that is, the insurance officials likely to be assess risks) to determine whether certain medical conditions are hereditary in nature. This section also requests information on any drug or that alcohol usage, motor vehicle infractions, criminal and related convictions may signal dependency or addiction.

Affirmative answers.' Although most questions in this section are answered in the With an affirmative, "yes," Or negative, "nO," any qUeStiOn answered in affirmative requires a detailed explanation. It is the information contained this section of the application that may lead the underwriters to ask for additional information and/or detailed medical reports'

Additional information: The additional information required by underwriters the may be obtained in a variety of ways. The application form authorizes directly insurance company to forward an "Attending Physician's Statement" pays to the family doctor of the proposed life insured. The insurance company for a report from this physician that contains details of the life insured's medical history (i.e. previous illnesses, operations, treatments, and current insurance condition and medication). This report is forwarded directly to the request other company by the family doctor. The insurance company may also including an Inspection Report, a Drug and Alcohol

information,

and occupations Questionnaire.

Questionnaire, or a Hazardous Sports

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Module 3: Underwriting and Claims

Medical exam: The company may request and pay for a medical examination t-rf the life insured carried out by its own medical staff; or by a provider designated by the company, or the life insured's physician. The ensuing report

is sent directly to the insurance company. If information in the application or trther medical sources dictates, the company can require the life insured to undergo a test or a series of special medical tests (e.g. a stress test). These tests ere at the expense of the company and all reports are forwarded to the itrmpofl}/ for evaluation. llhere are three levels of testing: Non-medical (performed by the agent) Para-medical (performed by a nurse)

Full-medical (performed by a doctor)

Ite

level of testing depends on the underwriting requirements of the policy.

^spection Report: The inspection report details any hazardous occupation or ::';reational activity, as well as financial data on the policy owner and the life :--:ured. Tho financial data ensures the ability of the policy owner to meet :::mium obligations, and makes certain that the amount of the death benefit is ':-rsonable in relation to the loss suffered by the beneficiary as a result of the :,:-.ih of the insured.

I

::

erample,

if a single applicant

without dependents who earned $40,000 u.::ually applied for a $2 million life policy, the company would deem the ur:licant o'over insured" under normal circumstances. The level of the death :'::---tlt is simply not justified, and becomes, by nature, suspicious. information: Additional authorization is contained in the application that -, :..r s the insurance company to obtain information from the Medical -:. -nation Bureau (MIB). Insurance companies who are members of the MIB -r. required to report certain medical information gathered during the r.i;-::nt-;,itr* process to the MIB. This information is kept in the MIB ht B

;l;:JSe. Underwriters can then receive information from the database to assist n :s-ressing the insurance risk; however, the insurer cannot use MIB n - -:::ration to decline coverage. The MIB provides their information to the ur

::'r',\'riter in the form of a code. Each code represents impairment and alerts

-:surer that further information should be obtained. The MIB does not 11*' , -Je copies of doctor's reports or test results. iLlnd

The Canadian Life Insurance Course

The MIB

The Medical lnformation Bureau (MlB) is a database of medical information of all those who have applied for insurance coverage' This data is made available to all insurers. lt allows them to verify whether an applicant has concealed relevant medical information in his or her aPPlication.

Product Details

will detail exactly what the applicant

This part of the application

has agreed to

to purchase. The agent must have thoroughly presented beforehand all options including advantages and disadvantages of the proposed

the applicant

will include details on the type of policy

purchase. The application

and any

riders or other benefits.

It is also essential that the agent review this information carefully; a policy the mistakenly issued for $500,000 instead of $50,000 may be binding on insurer, although the insurer may seek damages from the agent. This will be true of other errors as well. l'ledical details are

part of the

Sources of lnformation for the Application

information about the insured l<nown

person as life insured)

A three-party contract (applicant is a different person from life insured)

provided by aPPlic arfi

provided by aPPlic ant and

provided by aPPlicant

life insured provided by life insured

A two-party contract (applicant is the same

as

"evidence of insurability."

Personal information Medical information Details of the proposed insurance Prolgct

provided by agent; understood bY applicant

provided by agent; understood bY apPlicant

LESSON 2: Agent Responsibilities During the Application During the application process, the duties of the agent include: assisting with the aPPlication witnessing the signature of the applicant

obtaining the first premium when a TIA is issued reporting on the aPPlicant i

i I

I

t I

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Module 3: Undennriting and Claims

{.dditionally, an agent may, under the circumstances described below, issue a :imporary policy, called a Temporary Insurance Agreement (TIA).

jsslsf with Application

I::

asent must help the applicant complete the application form completely

::-J accurately. If there is a language barrier, appropriate steps must be taken to .:-sure that there is no miscommunication. The client must understand what he

:r .he is agreeing to and agreeing to do. ,',:en the client is mentally challenged and not legally able to make decisions, :.-;:pplication must be made through the client's guardian or power of r].:':ne].. rpplication by a disabled person, who is unable to sign the documents, be signed by his or her power of attorney.

*-':

lgent must be certain that all information given to the insurer about the .,r':..crnt is true, accurate, and free of any misleading information , and that all n: :::nation given to the applicant about the insurer and the policy is also true, ,r--r

:lte. and free of misleading information. No matter how trivial

such

,:*";--' may seem, all must be disclosed.

-'r,'::

You, as the agent, have an important

role in undenvriting.

fallout resulting from an agent's breach of duty to r"f--':: client or insurer. The agent report is part of the application in which the -u:it r'zrfl make observations about the applicant to assess the risk in .-an be significant

r.n{:,::,\-riting the policy.

e'.

S.

-{n}- information the agent receives from the applicant is deemed to have -reen

given to the insurer. This is known as constructive notice.

i::6-,5:5S

fhe Stgn atU fe i: ;-tent secures and witnesses the signature of the life insured and the -iT'r ; inl (if a third party contract) on the application. This is essential since rllr; -. -rtJfLlre is an acknowledgement that the information contained in the ,,1r1$llir

*"l

;ir

;::non is both true and accurate.

lfr:'.

the First Premium to Substantiate the Temporary lnsurance u;r'zenent (TIA) -r.: :i3rrt must also obtain the first premium payment from the applicant ri;:r'r -:r standard rates and subject to certain limits. This initiates coverage " rl":* : TI-\ is issued.

3-7

ffi

The Canadian Life Insurance Course

I

The first premium should not be collected

will carry premiums that will

if there is a suspicion that the policy

be higher than standard rates.

Reporting on the Applicant As we have seen, the agent is responsible for collecting a large amount of personal information about the applicant's income, medical history, personal habits, and lifestyle. He or she is bound to maintain the confidentiality of this

information, while at the same time act as the eyes and ears of the company that will ultimately decide whether or not to insure the applicant. In a sense, the personal contact, information-gathering process and experience allow an agent to make an initial, if not binding, decision, as to whether an applicant is insurable at a standard or higher rate, or is uninsurable. The final decision rests

with the insurance company.

Te m porary I n s u ran

Issued

by

ce Ag ree ment (T I A)

agents, and sometimes called

a binding premium receipt or

a

conditional insurance agreement, a Temporary Insurance Agreement (TIA) is

a binding contract between an insurance company and the insured.

The

agreement provides a guaranteed amount of life insurance coverage before the

underwriting process begins.

A TIA

to certain limitations), because the policy has not been approved nor issued. An agent should only issue a TIA if he or she believes that the proposed life insured is "insurable" and has received places the insurer at risk (subject

a completed application for the

If the agent is in

policy

as

well as a first premium payment.

doubt as to the applicant's insurability, or believes that the

company would issue a rated policy, then a TIA should not be issued.

If

additional information is required from an applicant, the applicant is informed in writing and the premium is returned. This terminates the TIA and so effectively removes the risk the company faces during the period the TIA is in force while the main policy is being underwritten.

TlAs have certain restrictions. These include: the life insured must be insurable at the standard rate in order to validate the TIA TlAs contain maximum coverages regardless of the amount of insurance applied for

Limitations . of TtAs o

\-

Module 3: Underwriting qnd Clsims

LESSON 3: Underwriting

It's in the best interest of the client, the

The completed application goes through the underwriting process when it has been submitted by the agent before a policy can be issued.

insurer, and you-the agent-to ensure risk

properly

assessed.

Underwriting is all about risk assessment. It is the process of assessing and classif ing (or rating) the potential degree of risk that a proposed insured represents to an insurance company. Underwriting is not a responsibility of the

insurance agent, although he or she plays a vital role in the process. Rather,

:s the task

it

of individuals (underwriters) who work within the underwriting

i:partment of life and health insurance firms.

lle

underwriting department tries to ensure that the actual mortality rates of ::r. company's insured's do not exceed the rates assumed when the premium ::Ies were calculated. Ifit appears that people are dying at a younger age, then 'l rrtality rates are adjusted to keep premiums in line.

-:-; underwriters consider an applicant's age, weight, physical condition, :::r idual and family medical history, occupation, financial resources, and ".::'r t-actors to determine the degree of risk represented by each applicant. The -:r. is then reflected in the premium to be paid by the applicant: high risk, high :"::rium

-

low risk, low premium.

,Hartality Rafes . The rate of mortality is the number of people expected to die at a given age, based on 1,000 people of the same age.

o

lnsurance companies use rates of mortality to construct mortality tables. The tables are used by underwriters in the calculation of premium rates.

.

Separate mortality tables are developed and used for any group when the life

expectancy of that group differs from

a

comparable group. For instance,

different tables exist based on gender and smoking status.

3-9

is

The Canadian Life Insurance Course

How Premiums Are Calculated

Life insurance

companies have two sources of income: premiums and investment earnings from the portfolio of investments that they hold. This income is used to pay all benefits due to policyholders, pay the company's operating expenses, and earn a profit for any shareholders in the company.

The calculation of premiums is therefore very important. Done by actuaries, it is based on how much money is needed to pay the benefits due on death or on

the maturity of a policy. In order to properly calculate premiums, actuaries must consider mortality rates, interest earnings (the present value of money), and the operating expenses of the company.

Mortality rates are used to estimate the number of people expected to die at each age. This information (contained in mortalifit tables) allows the actuaries to estimate the amount of premium income the company will receive from a number of policyholders over a specific period of time. Separate mortality tables are used for different groups of people since they represent different levels of risk for the insurer. For example, non-smokers will have a lower premium than smokers, because they have a different mortality rate than smokers.

Morbidity rates are used to estimate the number of people expected to become disabled at each age. This information (contained in morbidity tables) allows the actuaries to estimate the amount of premium income the company will receive from a number of policyholders over a specific period of time.

Separate morbidity tables are used

for different groups of people since they will have a

represent different levels of risk for the insurer. For example, men

lower premium than women, because they have a lower morbidity rate than women.

The Sequence of Undelwriting rates of mortality

3-10

mortality tables

premium rates

Module 3: Underwriting and Claims

When calculating premiums, the actuary must also consider the time value money (discussed in detail in module 10). Sometimes called o'present value money," it describes how money received today has greater value than

of of

if paid

in the future because of the interest that it can earn. Actuaries must, when determining interest rates, consider anticipated earnings on interest as well as the rate of return on existing and future investments. The two factors-mortality rates and investment income-are considered the net

premium of a policy.

What does the word "undenruriting" have

to do with

insurance? lt comes to us from the ancient manner in which British merchant ships and their cargos were insured. Those wishing to insure their ships and cargos drafted letters of The Origin

of Underwriting

agreement disclosing the name of the ship, its cargo, destination and risks in effect, the forerunners of modern insurance contracts and posted them in establishments along the London waterfront. Those willing to share the risks would sign these agreements below (writing under) the listed risks, thus "underwriting" a portion of the risk for the ship and cargo during the voyage.

lhe t'inal component in the calculation of premiums is the operating expenses -: the insurer. Once these are estimated, part of each premium is allocated :-,.rard the payment of these expenses. This allocation is called "expense {,.rading," and since many business expenses, including sales commissions, are

:.;urred in the first year of

a

policy, expense loading in that year is higher than

':er. This is a front-end load. :- policy's "gross premium" is comprised of its net premium plus expense -:d.

-: :

small number of cases, underwriters require additional information before j:cision can be made whether to issue a standard policy, arated policy (dealt " '",::r later), or reject the risk and decline the policy application. The additional ::,rrmation may be obtained from a variety of sources including:

o .

the applicant

third party sources that report on medical, consumer, credit

and

lifestyle issues

r

credit and motor vehicle reports

3-11

The Canadian Life Insurance Course

Every province levles premium taxes on the premium paid on all types of insurance sold or premiums paid within the province. The

Premium Taxes

rates vary from a high of 4% (2001) in Newfoundland to 213 of 1% in Saskatchewan. The policy owner pays the tax as part of the premium, not in addition to the premium. So, even though premiums for level term insurance stay the same over the life of the policy, if the policy owner moves from one province to another and the policy is renewed in a province different from the one in which the policy was issued, he or she may find that premiums are slightly greater or smaller than previously. ln some provtnces, Fraternal org anizations are exempt from premium taxes.

Hazafds and Perils Hazards contribute to perils. Ahazard can be physical or moral. Perils lead to pure risk and pure risk leads to loss.

Physical Hazard Moral Hazard

Properly assessing risk

may mean some

bad

news for the client.

A

high degree of risk could require higher premiums.

These concepts can be understood if you visit the scenario beginning module B in which you are disabled by tripping over the dog's leash that you leave on your front step. By leaving the dog leash on the step, you both increase the probability it could be tripped over and increase the possibility of the severity of the loss because someone might trip and fall down the stairs. The physical hazard is the dog leash; the moral hazard is your habit of leaving the dog leash lying on the step instead of winding it around the stair handrail; the peril is your disability and the loss is your dirninished income while you recuperate.

Unacceptable risk will

mean the policy

Ratings for Special Risks

is

denied.

Roughly I0%o of applicants are identified as special risks or substandard risks when they apply for life insurance. This actually means that they present a

likely to make a claim. A medical condition, medical history, occupation, or lifestyle can give rise to higher mortality rates than those used to determine the insurance company's greater risk to the insurer because they are more

3-r2

Module 3: Underwriting and Claims

If the insurer decides to accept the additional risk, a rated contrqct will be offered with higher premiums than for those in a standard standard premiums.

policy.

Another possibility is for the life insurance company to offer a modified contract that would exclude the additional risk (an exclusion rider). For life insurance, the

life

insured who skydives may be offered the choice

additional premium or an exclusion that would not pay the death

of an benefit if the

in a skydiving accident. For disability income insurance, the insured who has a history of lower back pain may be offered a policy that lit-e insured died

u ould exclude any claim originating from the lower back.

Pennqnent or temporary increases: The extra premiums are either permanent nr temporary depending on whether the special hazard or risk is expected to last for the complete term of the insurance or only for a portion of it.

If

the

:.rlicy was issued at a substandard rate and the cause for that rating no longer erists. a request from the client, accompanied by medical evidence, is usually ;nough to remove the substandard rating.

\.8.

After a standard policy has been issued at regular rates, the insurance company cannot later convert it to a substandard rate.

.:.;r dollar increases: The higher premiums for a substandard rating may be s:: out in the policy and can be based on a flat dollar amount per unit of : :'.'erage. This is normally done in a case where a condition is temporary or is

:r-]ected to subside with time. A flat dollar amount might, for instance, be -'.-;ulated as $15 per $1,000 face amount of coverage. So, if a policy had a ':,- : amount of $ 100,000, the premium would be increased by $ I ,500.

:."-.'tttege increases: If a percentage rating is used, the standard premium is -,::iiS€d by a stipulated percent. These are also referred to as table ratings. ,- ::.trle 2 rating, for example, would represent a l00o/o increase in the :n:::lrum. Sometimes both methods will be used. For example, if the condition ":,-'h gave rise to the rated premium is severe but is expected to abate if the , ': -nsured survives for more than three years, the rating might be based on a 'rr' : increase in the standard premium for life, plus an additional $15 per I .,",t-t tbr the initial three years.

3-13

The Canadian Life Insurance Course

Rejection of Appl ication when an applicant poses too great a risk, the application will be denied.

Approximately 2Yo of all applications are turned down or declined. It may be

difficult for the agent who has sold the policy to tell the applicant that the policy will not be issued, but it is the responsibility of the agent to do so. The rejection of the insurance must be confirmed in writing, and premium monies returned to the applicant.

When the underwriters have reviewed the information from all sources to assess the risk of the proposed life insured, they will either recommend a standard or a rated policy be issued, or reject the application entirely. lf a rated policy that carries higher premiums is prescribed, the company should confirm that the applicant will accept a rated policy before it is issued. The lnsurer will issue the policy with an amendmenf that the policy owner must sign before the policy can be placed in force.

The

Applicant Has a Say

The Role of the Agent in Underwriting The role of the agent is very important throughout the whole of the underwriting process. The agent must personally deliver the policy to the applicant. He or she is duty-bound to report to the insurer any material changes in the health and/or lifestyle of the applicant that would alter the risk of his or her insurability from the time that the application is made until the policy is delivered. If a material change is evident, the policy should not be delivered and should be returned to the company along with an explanation, including the reason for its return (such as, "Since application was taken, the client has been seriously injured at work and is now on disability"). once the policy has been issued and sent to the agent for delivery to the client, the agent has a number of tasks to perform:

/ / / /

conftmthe accuracy of the policy confirm no material changes have occurred review the policy with the policy owner obtainthe policy receipt

Confirm Accuracy The agent must check to ensure that the particulars of the policy are correct. This means that the agent must be certain that the names, ages, and addresses are set

out and spelled correctly. The type of plan, listed benefits, face amount, premium 3-T4

Module 3: lfndennriting and Claims

option, and dividend details must be accurate and in accordance with those applied for. In the event that the policy contains inaccuracies, it must be returned to the company for correction before the agent delivers it to his or her client.

\.8.

Mistakes can make the policy contestuble (that is, the policy can be made

void within two years of its date of issue if mistakes are discovered by the insurer).

Confirm No Material Changes Prior to actual delivery of the policy, the agent must confirm that there has been material change in the health of the life insured. A material change is one that ',r'ould (possibly) change the rating assigned to the life insured. If there has been a :r{-r

raterial change, the agent should not deliver the policy, but should report the :hange to the insurance company. The underwriters may need to reassess the ::sks that result from the change.

leview the Policy --\hen

delivering the policy, the agent must review all of the policy features and

:rr''\.isions with the owner. He or she must take the time to be certain that the :,:,ii.-)- owner understands the policy that has been purchased. This reduces the

:':s>ibility that the owner will cancel or "rescind" the policy (that is, exercise his :': her right of rescission which means the right to cancel the policy within 10

-j

s)

or allow it to lapse later on.

\.8.

The courts have held that an agent has a duty to advise a client on what

policies his or her company has available, and the advantages and disadvantages of the policies as they apply to the client, so that the client

lssuing the policy

can make an informed choice.

receipt is one of your most important

's;-<;-o

fhâ&#x201A;Ź Policy Receipt

duties as an agent!

r. ;,,:nicv receipt is usually signed by the policy owner and witnessed by the

the policy is delivered. The policy receipt should contain the number and the date of delivery. The latter is very important as it

;u"r::.: u'hen

:'-

-,;r

r

: '-

rdes proof of the date on which the 1O-day rescission period begins.

3- 1s

Evidence of Material Change Glen Greenback, life agent for Guernsey Global Ltd., has taken an application on a $2 million whole life policy from his squashplaying buddy, Nick Karom' The undenvriters have approved

the application, a standard policy has been issued

and

forwarded to Glen for delivery to Nick'

Glen calls Nick's secretary to book a squash game, have a drink, and deliver the policy. The secretary informs Glen that Nick is unavailable; that he has his first flying lesson scheduled, and mentions in passing that he is now known around the office as "flyboy."

An alarm bell should sound for Glen. He should not deliver the policy. lt is obvious that Nick's flying lessons pose a rnaterial change in his lifestyle that may impact on the risk on which the life policy is based. Glen should inform the undenruriters of this change. The underwriters will then decide whether to reissue the standard policy, issue a rated policy based on the new information, oF decline the application.

Module 3: Underwriting and Clqims

LESSON 4: Reinsurance

There are three

Insurance companies place a cap or upper limit on the amount of coverage that

they

will place on an individual life. This is called

the retention

limit.lf

the

retention limit of an insurer is exceeded, part of the risk will be passed along to a reinsurer in a process called reinsurance. The reinsurer, or company that

parties in the reinsurance process:

the insurer, reinsurer, and retrocessionaire.

accepts the transferred risk, is called the ussuming company while the insurer

that has issued the policy to the applicant is called the direct writer or ceding

company. Thus, reinsurance spreads the

risk of large claims between

the

original insurer and a second insurer.

The second insurer, the reinsurer, shares risk above its retention limit with a retrocessionaire (a third insurer), or a number of different retrocessionaires in a

process called retrocession (which can

be interpreted as reinsuring the

reinsurance!)

Proportional or non-proportional reinsurance: Proportional reinsurance rnr-olves the insurer and reinsurer sharing an agreed-upon percentage or portion of the original premiums and subsequent losses. Non-proportional reinsurance, also called excess of loss reinsurance, involves the reinsurer ndemnif ing the insurer for losses exceeding a pre-determined retention limit.

The Three Degrees of Risk-Taking ilnsu imffiili Iftlilifrâ&#x201A;Ź,d E

rer the direct writer

rer nsu

rer

(also called the assuming company)

retrocessionaire

r oeding company)

increasing risk

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The Canadian Life Insurance Course

LESSON

Claiming lnsurance Policy Benefits

When a benefit is to be paid by the insurer, the process of making a claim begins and the insured or beneficiary becomes the claimant.

A claim is settled (i.e. money is paid

by the insurer) differently according to

whether the policy is:

/ / / A life

v life insurance policy a disability policy an accident and sickness policy

insurance policy

is settled by payment of the net death benejit (face

amount subject to any adjustments) to the beneficiary.

An individual disability policy is settled by paying an income to the policy owner in the amount and for the period of time the policy has described. A group disability policy makes an income payment to the group life insured.

An accident and sickness policy is settled by a lump-sum payment or payments to the policy owner that is a reimbursement of qualified medical claims.

Defining Income Paymenfs

lnsurance policies specify income payments to distinguish them from lump-sum payments. An income payment is received as a made weekly, ffionthly, quarterly or regular series of payments period of time (e.9. $2,000 per month over 24 annually - over a payment is typically received as a death months). A lump-sum benefit; the face amount of the policy is received as a lump-sum by the benefici ary (e.g. $50,000 as the value of the death benefit).

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Module 3: Undennriting and Claims

Claimant

A claimant is the person or legal entity (e.g. estate) that is claiming the benefit from a life insurance policy.

Glaimants of Insurance Policy type

Glaimant

Life

benefi erary

Individual Disability

policy owner

A&S

policy owner

Group policy

group policy owner or insured

The Glaims Examiner claims examiners receive and review the information from the agent

as

well

as

the claims statement to confirm that:

o . o r

the insurance contract was in force at time of the claim

if a life policy,

the deceased was the life insured

the loss is covered by the contract the claimant is the same as that named in the policy

Settling a Claim for a Life lnsurance Policy

\\hen the agent learns of the death of the life insured, he or she must supply rFre claimant with the forms necessary to advance the claim for benefits. The iqent may assist in completing the forms before he or she submits them to the claims examiner (the person who verifies that the claim is valid), at the insurer's head office. Whenever a claim is made, the agent must provide the company with the policy number, name and address of the deceased, date of death and cause

(if known), the beneficiary's name,

and the name and address

of the claimant.

\ll

death claims require

a claimant's statement (completed by the person

::questing the benefit) and an Attending Physician's Statement (APS) that iLrnfirms the date and cause of death. Sometimes, a copy of the death certificate, coroner's report, or provincial medical examiner's report may be :equired. If the estate of the deceased is named as beneficiary, a certified copy :f the letters probate or letters of administration are required. A11 of these dLlcuments are supplied at the expense of the claimant. Finally, the policy must

te retumed to the insurer, or a loss of policy form must be submitted where the -'riginal policy cannot be located.

3-r9

The Canadian Life Insurance Course

ll a policy olvner

fails to

pay premiums or repay

a

loan, his or her death

When satisfied with all of the above, the examiner calculates the amount to be paid under the claim. This is called the net death benefit.

benefit can be reduced.

The net deatlt benefil is the face value of the policy, plus any extras the policy

owner may be entitled to receive. Extras include payments that may be increased by a rider such as the accidental death benefit, unpaid dividends, paid-up insurance or the account value, ifthe policy is a universal life contract that has specified a return of the value of the account. Subtracted from this figure are any outstanding premiums and policy loans, including any interest outstanding on the loan to the date of death.

Nef Death

Benefit Calculation

Face amount of the policy PLUS + extras, as entitled MINUS - policy loan and interest to date of death MINUS - outstanding premiums

EQUALS

=

Net death benefit

A Case of Material Misrepresentation Bob Pastel, agent for Sempra Fidelity lnsurance, has made an appointment to assist his client, Albert Small, in completing the application for a $500,000 whole life policy. Prior to the meeting, Bob completes part of the application with details of Albert's full name, address, occupation, and age. Bob records that Albert's name is Albert Small when, in fact, it is Albert Small, Jr.

When they meet, Bob asks Albert whether he has sought medical attention within the last 3 years. Albert says that he recently went to the doctor to be treated for the flu. While this is true, what Albert does not tell Bob is that the doctor discovered that the "flu" symptoms were caused by fluctuations in the level of Albert's blood sugar, and placed Albert on a sugar-reduced diet.

Sempra Fidelity issued a standard policy on the life of Albert who, tragically, fell into a diabetic comma and died three months after the policy was issued.

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t_ t

Module 3: Underwriting and Claims

Could Sempra Fidelity successfully deny payment of the death benefit to Mrs. Small, who was the benefici ary under the policy,

on the basis of the two items of

misinformation

in

the

application?

The answer is probably no and yes. They are

both

misstatements, but for a misstatement to be the ground to void a policy, it must be material to the risk. A statement is material only if the company would have rejected the application or accepted it with a rated premium. Here, the absence of Jr. in the name is not material to the risk in the poli.y; based on this statement alone, coverage could not be denied. However, Albert's failure to disclose the medical diagnosis and treatment would be considered material to the risk, and the insurance company would have the right to deny the claim.

The Agent and the Estate: Upon approval of the claim, the insurance itrmpony pays the death benefit directly to the beneficiary named in the policy.

\aming a

other than the estate has real benefits. The death renefit is not included in the deceased's estate when calculatrng probate fees lnd can, therefore, save the estate thousands of dollars. benefi crary

\\hile the agent should not be directly involved in the administration of the :state of a policy holder, the agent should be available to give advice to the reneficiary and professionals involved in the estate administration. Lawyers, .:,-countants, administrators, and executors may look to the agent for advice on

:he various settlement options available

in life policies, annuities, and group

n-rlicies.

Settling a Claim for a Disability Policy

Disability claims result from: a disability policy a waiver of

disability premium

Disability Policy Claims: Disability policies are issued to individuals and to :roups. There are differences between the claims process for each.

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The Canadian Life Insurance Course

Individuol Policy Owners: Filing a disability claim can be a stressful time for the claimant. Daily living has been disrupted because the insured has become disabled as a result of sickness or an accident; the insured is unable to work at his or her job; no money is coming in and chances are good that the policy owner is upset and possibly not feeling well enough to deal with the insurance company. The agent needs to be respectful of such feelings while responding

quickly to requests.

Unfortunately, there is more opporlunity for strife between policy owner and i

insurer when settling a disability claim than any other type of claim. The insurer must be satisfied that the disability claim is for a disability covered in the policy. The insured, meanwhile, is not concerned with definitions but only

I I

I

i i I I

in receiving the benefit to which he or she feels entitled to receive.

I

i

I

E As you

H

will

learn in module 8, the purpose of a disability claim is to

ill I

I

replace lost income.

I

l

The agent must be certain that the disability prevents the policy owner from performing the essential duties of his or her regular occupation and that the disabled is under the care of a doctor. A claimant's statement will be required

t I fi

I

H

for:

I r

o o o

$

I t

I

I ; I

Read

the date on which the disability began the cause, nature, and treatment of the disability the identity of the claimant's physician

it now, know it

later...more

on

Possible disputes occur when the claim examiner finds that, even though the

f;

disability in module

8.

policy owner is disabled, the definition of total disability in the contract

t

has

not been met.

The policy owner of an individual policy chooses between three levels of total

disability when the policy is taken out:

o o .

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any occupation (any occ)

regular occupation, of own occupation (own occ),

Module 3: Undenariting and Claims

Temporary disability will be paid as a monthly benefit after the waiting period. Permanent disability is usually paid out as a lump sum after a 12month waiting period during which the insurer will ascertain if the insured is prevented forever from engaging in his or her own or any occupation.

When a claim is made, it will be wise to remind the policy owner of the waiting period (called the elimination period) provided in the policy until the benefits commence. This period can be as short as one day or as long as two years. It is also prudent to remind the policy owner of the benetit period

length of time income will be provided by the policy, and any

the

government

benefits that he or she may be entitled to receive.

The waiting period is the time before benefits are paid; the benefit period is the

time during which benefits are paid. Short waiting periods and longer benefit periods both mean more expensive coverage.

The insured has 30 days from the date a claim arises to notify the insurer or asent in writing of the claim and 90 days from the date a claim arises to provide proof of the claim.

The benefits from a disability income policy end when the insured returns to w ork or the coverage ceases in the contract, whichever comes first.

Group Policies:

A

group disability plan insures groups of people instead

of

individuals. Group plans are most common among employee groups, (that is,

all the people who work for XYZ Co. will be covered by the XYZ Co. group plan).

J Module 9 describes group insurance. \\hen

policy owner is the employer. The employer determines the amount of insurance that will be put in place and the conditions a group plan is in place, the

under which a claim can be made.

Employees

will

either deal with their employer to make a claim or with the

insurer directly. Again, a claimant's statement

r r o

will

be required for:

the date on which the disability began the cause, nature, and treatment of the disability the identity of the claimant's physician

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The Canadian Life Insurance Course

As with individual insurance, the insurer will want to be satisfied that the claim is valid.

The definition of disability in a group policy differs from individual policies.

N.B.

Fraudulent disability claims are areal problem for insurers; an insurer

may even put a claimant suspected of fraud under surveillance in an effort to disprove his or her claim.

It is to the benefit of the group that the disability plan is not abused; abuse wr]l only lead to disqualification of the group or higher premiums. Higher premiums can lead to part of the premium cost being passed along to the employees, or termination of the plan because the employer can no longer afford some or all of the cost of premiums.

Waiver of Premium.' A waiver of premium is a rider in a life or disability policy in which the policy owner is not required to pay premiums on the policy if he or she is disabled according to the definition of disability in the rider or policy. The underwriting of this rider is separate from the underwriting on a life policy because the risk in the rider is the person who pays the premium.

This person may not be the same as the life insured.

The waiver of premium takes effect after the waiting period that follows the onset of total disability. The waiting period is normally three to six months from the onset of a qualiffing total disability. It is designed to eliminate short-

term claims, and thereby maintain reasonably-priced premiums for this coverage.

After the waiting period, if approved, the insurer pays both future premiums on the policy, and refunds premium payments made by the owner during the

waiting period. In order to advance a claim, the claimant must inform the insurer of the disability and file a claimant's statement detailing the date on which the disability began, the cause, nature, and treatment of the disability, and identity of the claimant's physician.

The physician of the claimant must provide the insurer with an Attending Physician's Statement that sets out details of the disability, and an estimate of its duration.

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Module 3: Underwriting and Claims

As with the disability policy itself, the insured has 30 days from the date a claim arises to notiff the insurer or agent in writing of the claim and 90 days from the date a claim arises to provide proof of the claim.

Settling a Claim for an Accident and Sickness Policy

Like disability policies, accident and sickness policies, also called

health

You'll learn more details

insurance, are written for both individuals and groups. These policies provide

about A&S in modules

lump-sum payments as reimbursements for medical expenses incurred while

and

traveling or, depending on the type of policy, for treatments or prescriptions.

A claim form must be completed by the insured and either submitted directly to the insurer if an individual policy or to his or her employer, when a group policy. Invoices must be attached to this form for approval to veriff the claim form.

There is no waiting, or elimination, period for an accident and sickness policy

although there may be a deductible (an amount the insured pays before payment is received from the insurer), and a co-insurance factor (a percentage of costs that the insured pays).

Payment

is usually made directly to the individual or group life

insured

although some professionals (e.g. dentists) may submit claims directly to the insurer on behalfofa group life insured, and are paid directly for any service and/or treatment given.

Denying Claims It is possible that the insurer will not make a payment to the claimant for r-rf

one

the following reasons:

o r

the policy may have lapsed for non-payment of premiums

the policy may have been surrendered by the policy owner for its cash surrender value (CSV)

o o

the policy may have expired by its own terms

there has been material misrepresentation by the applicant or life insured within the first two years of the policy

. fraud o the claim may not satisfy the definition of disability in the policy o if suicide has occurred within two years of policy issue or reinstatement

o

if the claim

arises from an exclusion (e.9. a skydiver with an exclusion

for a skydiving accident dies skydiving)

3-2s

9.

I

The Canadian Life Insurance Course

LESSON 6: Glaiming Government lnsurance Benefits The federal govemment provides a death benefit to the estate of a Canada Pension Plan (CPP) contributor to a maximum of $2,500. In addition,

at both the federal and provincial levels provide disability benefits to all Canadians who qualiff including those who have private governments

policies.

Sources of government benefits include:

o o o .

Canada Pension Plan (CPP)

Veterans Affairs

Employment Insurance (EI)

Workers' Compensation (Workers' Comp)

The CPP disability pension is received by both the disabled and

the

child/children of a disabled person.

Veterans of the First or Second World War, Korean War or a Special Duty Area may be eligible for disability pension benefits, loss of earnings benefits, lndividual insurance

income support, or supplemental retirement benefits through programs offered

by Veterans Affairs.

policies can

"top up" government

Employment Insurance (EI) provides benefits for sickness and maternity and parental leave.

plans.

Workers' Compensation (workers' comp) (also known as Workplace Safety and Insurance Board [WSIB]) makes a benefit available to employees whose injury or sickness is work-related. Thus, an injury or sickness that occurs while not "on the job" is disqualified.

To qualif' for a disability benefit for all of these plans except those available through Veterans Affairs, it is necessary to:

o e . .

have contributed to the plan meet the plan's definition of disability be youngerthan age 65 and

apply in writing

Claim forms for these plans can be acquired through their sponsoring federal or provincial agency.

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\

Module 3: Underwriting and Claims

Module 3: Summary of Key Points Take time

There are three parties involved

in undenruriting and

claims: the applicant/insured; the agent; the insurer.

Undenruriting by the insurer assesses the by a person who has applied for insurance.

risk

to

memorize all these key

points; you may find some of them

on the exam.

presented

Average risk = standard premiums.

Higher risk = higher premiums or policy with exclusions.

Unacceptable risk = denied policy.

Medical information about the applicant is key to risk assessment. The MIB is a medical information database that undenrvriters access to help determine risk of an applicant. lnsurers share risk with other insurers in the process called

reinsurance.

The agent must personally deliver the policy and make an on-the-spot judgment about whether the risk represented by the applicant is the same as when the application was completed.

A claim is when the insured wants to claim the benefit (i.e., money) of the policy.

Life insurance claims are settled when the life insured dies with a (net) death benefit payment to the benefici ary. ln order for a disability claim to be made, the insured must meet the definition for total disability that he or she has selected in the policy. any occ, regular occ, or own occ. lndividual disability policy claims are settled (that is, the definition has been satisfied) with a regular income payment to the insured.

A&S claims are settled with

a

payment that

is

a

reimbursement of qualifying medical claims.

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