Health Insurance Underwriting & Policy Provisions 

 February 2, 2022


Health Insurance Underwriting & Policy Provisions

  1. Basic Principles of Life, Health Insurance and Annuities
  2. Nature of Insurance; Risk, Perils and Hazards
  3. Legal Concepts of the Insurance Contract
  4. Life Insurance Policies, Provisions, Options and Riders
  5. Life Insurance Premiums, Proceeds and Beneficiaries
  6. Life Insurance Underwriting and Policy Issue
  7. Group Life Insurance
  8. Annuities
  9. Social Security
  10. Retirement Plans
  11. Uses of Life Insurance
  12. Health and Accident Insurance
  13. Health Insurance Providers
  14. Disability Income Insurance
  15. Medical Expense Insurance
  16. Private Insurance Plans for Seniors
  17. Health Insurance Policy Provisions
  18. Health Insurance Underwriting
  19. Michigan Laws and Rules Pertinent to Insurance

 Health Insurance Policy Provisions

NAIC Model Health Insurance Policy Provisions

Years ago, the National Association of Insurance Commissioners (NAIC) developed a Uniform Individual Accident & Sickness Policy Provisions Law model. Almost all states have adopted this model law or similar legislation or regulations. The purpose of the NAIC law was to establish uniform or model terms, provisions, and wording standards for inclusion in all individual health insurance contracts.


In accordance with the NAIC model law, there are 12 mandatory provisions that are required to be in all health insurance contracts. These are as follows:

  1. ENTIRE CONTRACT: Like its counterpart in a life insurance policy, the entire contract provision in a health insurance policy protects the policyowner in the following ways: The entire contract include the Actual Policy and the Application. It states that nothing outside of the contract (the contract includes the signed application, endorsements and any attached policy riders) can be considered part of the contract. It also assures the policyowner that no changes will be made or will any of the contract's provisions be waived after it has been issued. Any change to a policy must be made with the approval of an executive officer of the insurance company whose approval must be endorsed on the policy or attached in a rider.
  2. TIME LIMIT ON CERTAIN DEFENSES / INCONTESTABILITY: Under the time limit on certain defenses provision, the policy is incontestable after it has been in force a certain period of time, usually two years. This is similar to the incontestable clause in a life insurance policy. Unlike life policies, a fraudulent statement on a health insurance application is grounds for contest at any time, unless the policy is guaranteed renewable. In addition, the policy may not be voided, deny claims or even reduce claims solely based on pre-existing conditions. An insurance company can usually contest the information contained in an accident and health application (normally for a 2-3 year period) starting on the date the insurance company dates the policy.
  3. GRACE PERIOD: The policy owner is given a number of days after the premium due date during which time the premium payment may be delayed without penalty and the policy continues in force. If an insurer pays an individual accident and health insurance claim during a policy's grace period, the amount of unpaid premium may be subtracted from the reimbursement. Depending on the state, the minimum grace periods typically specified are 7 days for policies with weekly premium payments (i.e., Industrial Policies), 10 days for policies with premiums payable on a monthly basis, and 31 days for other policies. the effect of nonpayment of premium before the expiration of grace period will cause a policy lapse.
  4. REINSTATEMENT: Under certain conditions, a policy that has lapsed may be reinstated. Reinstatement is automatic if the delinquent premium is accepted by the company or its authorized agent and the company does not require an application for reinstatement. If the insurer takes no action on the application for 45 days, the policy is reinstated automatically. To protect the company against adverse selection, loses resulting from sickness are covered only if the sickness occurs at least 10 days after the reinstatement date. However, accidents are covered immediately upon reinstatement. 
  5. NOTICE OF CLAIM: The notice of claim provision describes the policyowner's obligation to the insurer to provide notification of loss within a reasonable period of time. Typically, the period is 20 days after the occurrence or a commencement of the loss, or as soon thereafter as is reasonably possible.
  6. CLAIM FORMS: It is the company's responsibility to supply a claim form to an insured within 15 days after receiving notice of claim. If it fails to do so within the time limit, the claimant may submit the claim in any form, which must be accepted by the company as adequate proof of loss.
  7. PROOF OF LOSS: The statement that an insured must give an insurance company to show that a loss actually occurred is a Proof of Loss. After a loss occurs, or after the company liable for periodic payments (e.g., disability income benefits), the claimant has 90 days in which to submit proof of loss. If, however, the insured is legally incapable of providing proof of loss within 90 days, they are able to furnish proof no later than a year. Payments that are not considered periodic must start paying immediately after receiving proof of loss.
  8. TIME OF PAYMENT OF CLAIMS: The time of payment of claims provision provides for immediate payment of the claim after the insurer receives notification and proof of loss. If the claim involves disability income payments, they must be paid at least monthly.
  9. PAYMENT OF CLAIMS: This provision states that health insurance benefits must be payable to the insured. It also allows payment of benefits directly to a hospital or provider of medical services. If a death benefit is provided under a heath insurance policy this provision provides for payment of benefits to a named beneficiary. If a beneficiary is not named, then the benefits will go to the insured's estate. If the beneficiary is a minor, then the insurer must pay the benefits to another relative by blood or marriage. This benefit amount may not exceed $1,000.
  10. PHYSICAL EXAM & AUTOPSY: The physical exam and autopsy provision allows the insurer, at its own expanse, the right to require a physical examination or autopsy of an insured prior to the issuance of a policy or the payment of benefits, unless it's forbidden by state law.
  11. LEGAL ACTIONS: The legal action provision states that no legal action can be brought against an insurer (by the insured) until 60 days after written proof of loss has been furnished to the insurer. The purpose of the Legal Action provision is to provide the insurer with adequate time to research a claim. Most states also adopted the NAIC recommendation that nay lawsuit brought against the insurer by the policyholder must commence within three years from the date proof of loss was furnished. However, some states (for example, Florida) have extended the time limite for bringing legal action against the insurer to five years.
  12. CHANGE OF BENEFICIARY: The insured, as policyowner, may change the beneficiary designation at any time if the beneficiary is revocable. However, an irrevocable designation may not be charged without the written consent of the beneficiary.

Eleven Optimal Provisions

There are 11 optimal health policy provisions. Companies may ignore them and use inly those that are needed in their policy forms.

  1. CHANGE OF OCCUPATION: This provision also allows the insurer to reduce the maximum benefit payable under the policy if the insured switches to a more hazardous occupation or to reduce the premium rate changed if the insured changes to a less hazardous occupation.
  2. MISSTATEMENT OF AGE: The misstatement of age provision allows the insurer to adjust the benefit payable if the age of the insured was misstated when application for the policy was made. If the insured was older at the time of application than is shown in the policy, benefits would be reduced accordingly. The reverse would be true if the insured were younger than listed in the application.
  3. OTHER INSURANCE WITH THIS INSURER: Under this provision, the total amount of coverage to be underwritten by a company for one person is restricted to a specified maximum amount, regardless of the number of policies issued. This provision is designed to protect the insurer.
  4. INSURANCE WITH OTHER INSURER: In attempting to deal with the potential problem of over insurance, the insurance with other insurer provision states that benefits payable for expenses incurred will be prorated in cases where the company accepted the risk without being notified of other existing coverage for the same risk.
  5. INSURANCE WITH OTHER INSURERS: Similar to the previous, the insurance with other insurers provision allows an insurer to pay benefits to the insured on a pro-rata basis when the insurer was not notified prior to the claim that the insured has other health coverage.
  6. RELATION OF EARNINGS TO INSURANCE - AVERAGE EARNING CLAUSE: If disability income benefits from all disability income policies for the same loss exceed the insured´s monthly earnings at the time of disability, the relation of earnings provision states that the insurer is liable only for that proportionate amount of benefits as the insured´s earnings bear to the total benefits under all such coverage.
  7. UNPAID PREMIUMS: If there is an unpaid premium at the time a claim becomes payable, the amount of the premium is to be deducted from the sum payable to the insured or beneficiary.
  8. CANCELLATION: Though prohibited in a number of states, the provision for cancellation gives the company the right to cancel the policy at any time with 45 day´s written notice to the insured. This notice must also be given when the insurer refuses to renew a policy or change the premium rates. If the cancellation is for nonpayment of premium, the insurer must give 10 day´s written notice to the insured, unless the premiums are due monthly or more frequently. The cancellation provision also allows the insured to cancel the policy any time after the policy´s original term has expired.
  9. CONFORMITY WITH STATE STATUTES: Any policy provision that is in conflict with state statues in the state where the insured lives at the time the policy is issued is automatically amended to conform with the minimum statutory requirements.
  10. ILLEGAL OCCUPATION: The illegal occupation provision specifies that the insurer is not liable for losses attributed to the insured's being connected with a felony or participation in any illegal occupation.
  11. INTOXICANTS & NARCOTICS: The insurer is not liable for any loss attributed to the insured while intoxicated or under the influence of narcotics. Losses due to injuries sustained while committing a felony, or attempting to do so, also may be excluded. Foreign travel may not be excluded in every instance, but extended stays overseas or foreign residence may cause a loss of benefits.

Other Health Insurance Policy Provisions

There are number of other vary important clauses and provisions that should be noted

  1. NO LOSS / NO GAIN PROVISION: These are state laws that supposedly prevent a policy owner from profiting from the purchase of insurance. They state that the purpose of insurance policies are primarily to "indemnify" a person for a loss. The principle of indemnity involves making the policy owner "whole" again; or restoring her to the same financial position which was present before an illness.
  2. FILING AND APPROVAL OF POLICY FORMS: Accidents and Health Insurance Policies must be issued and approved by the commissioner. If the commissioner does not reject the policy within 90 days it is considered approved as is. Insurers may request a hearing within 20 days if their policy is rejected.
  3. FREE LOOK (RIGHT TO EXAMINE CLAUSE): The free look provision allows applicants to inspect the policy after receipt and make a final decision about whether it meets their needs. If the individual cancels during the free look period, any premium paid is refunded. If the policy is canceled during the free look, the insurance company is not liable for any claims originating during that period. The free look period always begins the day the customer receives the policy. IN most cases, the free look period lasts for 10 days. However, the time period required can vary by policy type and state. For example, policies geared towards senior (Long-Term Care or Medicare Supplement Policies) typically require a 30 day free-look period.
  4. AVAILABILITY OF COVERAGE: This provision authorizes insurers to issue group health insurance policies to small employers (2-50 employees) to cover their employees
  5. DOUBLE INDEMNITY: A clause for the payment of twice the regular benefit if an injury is sustained under certain specified circumstances. This is a more limited benefit than a double indemnity benefit under life insurance policies.
  6. INSURING CLAUSE: The insuring clause is the part of the health insurance policy that states any definition required, the kind of benefits provided and the circumstances under which they will be paid, and the method of premium payments. The purpose of the insuring clause is to also specify the scope, limits, and conditions of the coverage provided.
  7. CONSIDERATION CLAUSE: In health insurance, the insurance company exchanges the promises in the policy for a two-part consideration from insured. Consideration is an exchange of something of value on which a contract is based. A health insurance contract is valid only if the insured provides consideration in the form of:  Date Coverage Stars / Initial Period Coverage / Initial Full Minimum Premium Required / Statements Made in the Application.
  8. ASSIGMENT PROVISION: Policyowners have the right to assign or transfer their rights. If a policyowner transfers all policy rights, an Absolut Assignment has been effected. In this case, the entire contract has been transferred to another party. However, if the owner assigns one of some of the rights to another, but not all, then the policyowner has engaged in a collateral assignment,
  9. ACCUMULATIONS (OR ACCUMULATION BENEFITS): An insurance company may add an additional percentage to policy benefits when the contract is continuously renewed. For example, a 10% accumulation (benefit increase) after 5 consecutive years of renewal. The purpose of accumulation is to encourage insured to always renew policies.
  10. CONVERSION PRIVILEGE OF DEPENDENTRS: Beginning October 1, 2010, the Affordable Health Care Act mandated that all policies and plans must provide dependent coverage up to age 26. Adopted children, stepchildren, and foster children usually are eligible for coverage. As long as a policy is in force, coverage for a child generally continues until the child marries or reaches the limiting age.
  11. WAIVER OF PREMIUM: The Waiver of Premium provision waives the payment of premiums after the insured has been totally disabled for the specified period of time. Normally, a waiver of premium provision has a 90 days waiting period until premiums are waived. In case, an insured recovers from the disability, then the insured must begin to pay premiums again. If the insured remains disabled, waiver of premium provision will remain effective until the insured reaches the age 65. Benefits due self-inflicted, wartime or military services injuries, and injuries received during the commission of crime are excluded.
  12. PROBATIONARY PERIOD: The Probationary Period provision in a health insurance contract becomes effective at the inception of the policy.
  13. BENEFIT PAYMENT PROVISION: This provision describes how benefits will be paid out by the policy. Some benefits are paid as lump-sum reimbursements, lump-sum indemnity periods, or as a periodic income benefit.
  14. OWNER'S RIGHTS PROVISION: The owner´s rights provision defines the person who may name and change beneficiaries, select options available under the policy, and receive any financial benefits from the policy.
  15. TYPES OF BENEFICIARIES: A beneficiary can be either specific (a person identified by name and relationship), or a class designation ( a group of individuals such as the "children of the insured"). If no one named, or if all beneficiaries die before the insured dies, death benefit will go to insured´s estate in this order: Primary (First In line) > Secondary (continent) > Tertiary.
  16. DEPENDANT CHILDREN BENEFITS: Dependent children must be covered by their parents health insurance plan until a certain age. Coverage may also continue for children who are incapable of earning their own living due to a mental or physical disability.
  17. PREEXISITNG CONDITIONS: Medical expense and disability income policies usually exclude paying benefits for losses due to preexisting conditions pertaining to illness, disease, or other physical impairments. Such exclusions are subject to the "time limit once certain defenses" provision. Any preexisting condition that the insured has disclosed clearly in the application usually is not excluded or, if it is, the condition is named specifically in an excluding waiver or rider.
  18. IMPAIRMENT RIDER: Also known as an exclusion rider, coverage "waiver" or a "waiver of disability". When attached to a disability income contract, it indicates that the insurer is accepting a greater risk. Since it may be unable to adequately assess the total risk the insurer decides to provide coverage for the individual but limit it in regard to the impairment involved (i.e., illness, injury, etc.). If such a rider is added, the producing agent should explain the limitations provided by the rider. This type of rider can be issued with or without an extra premium charge.
  19. WAIVERS FOR IMPAIRMENTS RIDER: Under this rider, an insurance company does not cover an insured's loss due to a preexisting condition. However, if the insured's condition improves, the company may be willing to remove the waiver. The purpose of this rider is to protect the insurer from undue risks.

Renewability Provisions

Generally speaking, the more favorable the renewability provision is the insured policyholder, the higher the premium.

  1. CANCELLABLE POLICIES: Coverage under a cancelable health insurance policy may be terminated by either the insured or the insurer. The renewability provision in a cancellable policy allows the insurer to cancel or terminate the policy at anytime, but must return unearned premium. An insurer must give a written notice of cancellation to the insured.
  2. OPTIONALLY RENEWABLE POLICIES: The renewability provision in an optionally renewable policy gives the insurer the option tor renew the policy or terminate the policy on a date specified in the contract.
  3. CONDITIONALLY RENEWABLE POLICIES: A conditionally renewable policy allows an insurer to terminate the coverage but only in the event of one or more conditions stated in the contract. Typically, related to the insured reaching a certain age or losing gainful employment. A conditionally Renewable Policy can increase premiums at time of renewal.
  4. GUARANTEED RENEWABLE POLICIES: Also known as Noncancellable Policies. The renewal provision in a guaranteed renewable policy specifies that the policy must be renewed, as long as, premiums are paid until the insured reaches a specified age. Guaranteed Renewable Policies normally have increasing premiums on the basis of an entire classification, not on individual classification basis.
  5. NONRENEWABLE POLICIES: Nonrenewable policies are normally associated with short-term health insurance. These are policies that are for established policy lengths of a year or less and are considered temporary.
  6. NONCANCELLABLE POLICIESA noncancellable policy cannot be cancelled (unless due nonpayment of premium) nor can its premium rates be increased under any circumstances. Noncancellable provisions are most commonly found in disability income policies. They are rarely used in medical expense policies. Noncancellable policies may not be changed in anyway by the insurer up to a specified age, so long as the premiums are paid. Noncancellable policies have higher premiums. The policy is renewable up to a specified age which is generally the standard retirement age of 65, after that the insurer may cancel or nonrenewal the policy. If an insured purchases a noncancellable policy at age 54, then the policy term must be for minimum 5 years.

Common Exclusions or Restrictions

The exclusions section is NOT included in the policy face (first page of an insurance policy). However, Medical Expense, Disability, Accident, Health, and Sickness Insurance Policies frequently cite a number of exclusions or conditions that are not covered, such as:

  • Injuries due to war or an act of war, self-inflicted injuries, and those incurred while the insured is serving as a pilot or crew member of an aircraft.
  • Military service since the insured is covered by the government while in its service; Some insurers also include a military suspension provision which limits or suspends disability income protection when the insured serves the armed services.
  • Foreign travel may not be excluded in every instance, but extended stays overseas or foreign residence may cause a loss of benefits.
  • Noncommercial air travel
  • Other exclusions are losses resulting from suicide, hernia (as an accidental injury), riots, or the use of drugs or narcotics.
  • Losses due to injuries sustained while committing a felony, or attempting to do so, also may be excluded.
  • Medical necessities: Even if an insured has a benefit for a particular service, if they do not have a medical need for that benefit, it will not be covered by their insurance.
  • Occupational injuries and illnesses that are covered by Worker's Compensation or care paid by the Veterans Administration are typically excluded.
  • Cosmetic Surgery, Experimental Surgery, and vision correction (i.e., eye exams) may also be excluded.

Important Notes

  • The grace period for a monthly premium health insurance policy is 10 days.
  • The unpaid premium provision permits an insurer to deduct any unpaid premium (usually due during the grace period) from the benefit.
  • Physical therapy is not considered to be a common exclusion for medical expense policy.
  • A Beneficiary Change can occur normally at any time during the policy term.
  • An Optional Renewable Clause allows an insurer the unrestricted right to terminate coverage at any anniversary or at any premium due date.
  • In Health Insurance Policies, the reinstatement provision is mandatory. 
  • The Change of Occupation provision is considered an Optional provision.
  • In Accident & Health Insurance, 60 days must pass after written proof of loss has been received by an insurer before the insured can bring legal action against the insurer.
  • The Legal Actions Provision of an accident & health policy dictates the time for filling claim disputes.
  • The Change of Occupation provision allows an insurer to adjust policy benefits and/or rates if the insured has changed to a more hazardous occupation.
  • If the insured suffers an injury as an innocent bystander during a bank robbery; because the insured did not commit or participate in the felony,  the insurer becomes liable for a loss (loss will be covered).
  • The purpose of the Coordination of Benefits Provision in group health care is to determine what is paid by the primary and secondary insurers in case of a claim.
  • Noncancellable Policies may not be changed in anyway by the insurer up to a specified age so long as the premiums are paid.
  • The renewability provision in a cancelable policy allows the insurer to cancel or terminate the policy at any time, simply by providing written notification to the insured and refunding any advance premium that has been paid.
  • The entire contract includes: Actual Policy & Application.
  • The Insured may file written proof of loss in any form if the insurer does NOT furnish forms after the insured gives notice of loss.

 Health Insurance Underwriting

Insurance companies would like nothing more than to be able to sell their policies to anyone wishing to buy them. However, they must exercise caution in deciding who is qualified to purchase insurance. Issuing a policy to someone who is uninsurable is an unwise business decision that can easily mean financial loss for the company. One of the main responsibilities of an underwriter is to protect the insurer against adverse selection.

Because this process involves the danger that an insurer is exposed to approving more bad risks than good ones, since there is a tendency for poorer risks to seek insurance; each insurer sets its own standards as to what constitutes an insurable risk versus an uninsurable risk, just as each insurer determines the premium rates it will charge its policyowners. Every applicant for insurance is individually reviewed by a company underwriter to determine if the applicant meets the standards established by the company to qualify for its Life Insurance Coverage.

The underwriting process is accomplished by reviewing and evaluating information about an applicant and applying what is known of the individual against the insurer's standards and guidelines for insurability and premium rates. Underwriters have several sources of underwriting information available to help them develop a risk profile of an applicant. The number of sources checked usually depends on several factors, most notably the size of the requested policy and the risk profile developed after an initial review of the application. The larger the policy, the more comprehensive and diligent the underwriting research. Regardless of the policy size, if the application raises questions in the underwriter's mind about the applicant, that, too, can trigger a review of other sources of information. The most common sources of underwriting information include: the application, the medical report, an attending physician's statement, the Medical Information Bureau, Special Questionaries, Inspection Reports & Credit Reports.


The application for insurance is the basic source of insurability information; it is a written request made by the applicant to the insurer asking for an insurance contract based on the information provided. Regardless of what other sources of information the underwriter may draw from, the application is the first source of information to be reviewed and will be evaluated thoroughly in order to determine whether to accept or reject the applicant. Thus, it is the agent's responsibility to see that an applicant's answers to questions on the application are fully and accurately recorded, In addition to that, the application is very important because it helps the insurer to know the applicant more, There are three basic parts to a typical life insurance application: 

  1. Part I- General
  2. Part II - Medical
  3. Part III - Agent's Report.


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

  • Type of policy
  • Amount of Insurance
  • Name & Relationship of the beneficiary
  • Other Insurance the proposed insured owns
  • Additional Insurance applications the insured has pending

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


Part II focuses on the proposed insured's health and risks a number of questions about the health history. This medical section must be completed in its entirety for every application. Depending on the proposed policy face amount, this section may or may not be all that is required in the way of medical information. The individual to be insured may be required to take a medical exam and/or provide a blood test or urine specimen.


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

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

  • Discussing the underwriting requirements that may impose new premium due to the insured's new age and possible new medical conditions.
  • Pre-existing conditions that may impose limited coverage in the new policy and other benefit limitations.


The application is one of the most important sources of underwriting information and it is the agent's responsibility to see that it is completed fully and accurately. AN insurance company will return the application to the agent if the agent submits an incomplete application. Then, the agent should schedule another appointment with the applicant to complete an unanswered questions. Statements made in the application are used by insurers to evaluate risks and decide whether or not to insure the applicant. Therefore, one of the actions a producer should take when submitting an application is to advise the insurer of any other relevant information not contained in the application. An application's statements are considered representations.

Representations are statements an applicant make as being substantially true to the best of the applicant's knowledge and belief, but which are not warranted to be exact in every detail. Representations must be true only to the extent that they are material to the risk. Warranties, on the other hand, are statements that are guaranteed to be correct. A warranty that is not literally true in every detail, even if made in error, is sufficient to render a policy void. Any false statement made by the applicant on the application is know as a misrepresentation. Misrepresentations generally do not affect coverage unless they relate to matter material to the risk. A Material Misrepresentation involves material fact that, had been known by the insurer at the time of application, would have caused the insurer to reject the application. If the material representations was intentional by the applicant, then it is considered fraud.

Each application requires signatures of the proposed adult insured, the policyowner if different from the insured, and the agent who solicits the application. The applicant's signature is required on an insurance application to represent that the statements on the application are true to the best of the applicant's knowledge. By reading and signing the insurance application, the applicant should realize that any false statements on an insurance application could lead to loss of coverage. These statements on an application are known as Executing Agreements because they place the policy into effect.

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

  • Once the application is submitted and approved it becomes part of the policy.

Policies may be issued as applied for by the applicant or they may be amended or modified by the insurer when issued. If they are amended or modified when issued, they are generally rated-up as well. This means that the premium will be higher than the standard rate.

Additional Underwriting Information


Quite often, a policy is issued on the basis of the information provided in the application alone. If the application's medical section raises questions specific to a particular medical condition, the underwriter may also request an attending physician's statement (APS) from the physician who has treated the applicant. An insurer's request for an attending physician's report must be accompanied by a copy of the signed authorization. The statement will provide details about the medical condition in question. Medical reports must be completed by a qualified person, but that person does not necessarily have to be a physician. Many companies accept reports that are completed by a paramedic or a registered nurse. When completed, the medical report is forwarded to the insurance company, where it is reviewed by the company's medical director or a designated associate.


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

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

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

Information received from the Medical Information Bureau (MIB) about a proposed insured may be released to the proposed insured's physician.


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


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


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

The purpose of these reports is to provide a picture of an applicant's general character and reputation, mode of living, finances, and any exposure to abnormal hazards, Investigators or inspectors may interview employees, neighbors, and associates of the applicant, as well as the applicant. When an investigative consumer report is used in connection with an insurance application, the applicant has the right to receive a copy of the report.

An insurer's obligation involving the disclosure of an insured's nonpublic information is to five notice, explain, and allow opting out. Inspection reports ordinarily are not requested on applicants who apply for smaller policies, although company rules vary as to the sized of the policies that require a report by an outside agency. If an insurance company obtains an inspection report on a prospective insured, it must inform the prospect that it is permitted to do so under The Fair Credit Reporting Act.


Each insurer must conform with state and federal laws regarding the dissemination of an applicant's or insured's private information according to the information and Privacy Protection Act. Also, this act prohibits insurers to base their decision solely on the basis of previous  adverse underwriting decision from support organizations, such as MIB and medical reports.


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

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


To protect the rights of consumers for whom an inspection or credit report has been requested, Congress in 1970 enacted the Fair Credit Reporting Act. As previously mentioned, this federal law applies to financial institutions that request consumer reports. Those who are denied coverage have the right to be provided with the source of the adverse information. Any information derived that reflects adversely upon an applicant may be challenged if claimed to be inaccurate of untrue.

The Fair Credit Reporting Act of 1970, or FCRA, established procedures for the collection and disclosure of information obtained on consumers through investigation and credit reports. The law is intended to ensure fairness with regard to confidentiality, accuracy and disclosure. The FCRA is quite extensive.

Agent Responsibility

As noted earlier, an agent plays an important role in underwriting. Any producer required to act in a Fiduciary Capacity when collecting premiums or dealing with the public. This means that all producers possess a fiduciary responsibility when engaging in insurance transactions. A producer who has made an unintentional error or honest mistake has committed a tort known as error and omission. Therefore, it recommended for insurers to purchase Errors and Omissions (E&O) insurance to cover the malpractice or negligence of producers.

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


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

As in many states, an agent is required to deliver to the applicant a Buyer's Guide and a Policy Summary. These documents are usually delivered before the agent accepts the applicant's initial premium. Typically, the buyer's guide is a generic publication that explains life an health insurance in a way that average consumers can understand. It speaks of the concept in general terms and does not address the specific product or policy being considered. The policy summary addresses the specific product being presented for sale. It identifies the agent, the insurer, the policy, and each rider. It includes information about premiums, dividends, benefit amount, and insurance cost indexes of the specific policy being considered.


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

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

Agents sometimes may have a chance to prepare applicants in advance when it appears that policies may be rated as substandard, which normally requires an extra premium. In addition, during this process an agent has the chance to inform clients that they may be able to add riders and endorsements to their policy to expand their coverage. A rider is an additional attachment to a policy that broadens benefits for an additional premium. An endorsement, on the other hand, is typed onto the standard policy. Explaining the policy and how it meets the policy owner's specific objectives helps avert misunderstandings, policy returns, and potential lapses.


In some instances, the initial premium will not be paid until the agent delivers the policy. In such cases common company practice requires that, before leaving the policty, the agent must collect the premium and obtain from the insured a signed statement attesting to the insured's continued good health. The agent then submits the premium with the signed statement to the insurance company. Because there can be no contract until the premium is paid, the company has a right to know what the policyowner has remained in reasonably good health from the time the policyowner signed the application until receiving the policy. IN other words, the company has the right to know if the policyowner represents the same risk to the company as when the application was first signed.


It is very rare for health insurance policies to be replaced by new ones. However, in some certain circumstances insureds may want to replace an old health policy with a new one to meet their current health needs. It is important for the agent during this process to thoroughly explain several key points when replacing a policy, such as:

  • The underwriting process may be stricter to issue  a new policy.
  • Pre-existing conditions may limit benefits and coverage that was available under the old policy.
  • There may be new benefit and coverage limitations and exclusion


The application for insurance must be completed accurately, honestly, and thoroughly, and it must be singed by the insured and witnessed. When an applicant makes a mistake in the information given to an an agent in completing the application, the application can have the agent correct the information, but the applicant must initial the correction. The company may also cancel the policy, depending on the errors made, but only before the incontestable period begins.

Classification Of Applicants

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


Uninsurable applicants are usually rejected and denied coverage.


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

  • Preferred risks generally receive lower rates than standard risks


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


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

Risk Factors In Health Insurance


An applicant's present physical condition is of primary importance when evaluating health risks. A physical conditions refers to the applicant's health (i.e., smoker vs nonsmoker applicants).


The habits or lifestyle of applicants also can flash warning signals that there may be additional risk for the insurer. Personalities and attitudes may draw attention in the underwriting process. These are called moral hazards. Examples of moral hazards include, but not limited to:

  • Excessive drinking and the use of drugs represent serious moral hazards.
  • Applicants who are seen as accident prone or potential malingerers (feigning a continuing disability in order to collect benefits) likewise might be heavy risks, particularly those applying for disability income insurance.
  • Other signals of high moral hazard can be a poor credit rating or dishonest business practices.

Other Risk Factors

Additional health insurance risk include the applicant's Age [The Older the applicant, the Higher the risk], Sex [Men show a lower rate of disability than woman, Pap test are sometimes required], Medical and family History [tendency toward certain condition or impairment], and Avocations [Skydiving or Mountain climbing Risk Hobbies) .


  • An insurable interest exists if the applicant is in a position to suffer a loss should the insured incur medical expanses or be unable to work due to a disability. AS with life insurance, Insurable Interest is a prerequisite for issuing a Health Insurance Policy.

Policy Fees & Premiums


Policy fee is a small transaction fee charged by some insurers for the first or subsequent years of the life of an Insurance policy, in addition to the regular premium. Policy fees are wither paid annually or only once at the time the policy was issued, depending on the policy.


The period of time for which policy remains in existence, as long as, premiums are being paid.


Premium is the initial payment and subsequent periodic payments required to keep a policy in force.


Premium Mode refers to the policy feature that permits the policyowner to select the timing of the premium payments. Insurance policy rates are based on the assumption that the premium will be paid annually at the beginning of the policy year and that the company will have the premium to invest (interest factor) for a full year. If the policyowner chooses to pay the premium more than once per year (monthly, quarterly, semi-annually) there normally will be an additional charge because the company will have additional charges in billing and collecting the premium payments. Premium mode is sometimes referred to as the Mode of Premium Provision.

Premium Payment Options

  • Annual
  • Semi-Annual
  • Quarterly
  • Monthly
  • Weekly

Note: The Higher the Frequency of Payments, the Higher the Premiums.

Earned premium is a pro-rated amount of paid-advanced premiums that has been "earned" by the insurance company for providing the insured coverage. Unearned premium is a pro-rated amount of paid-in-advance premiums that has not been "earn" by the insurer. Unearned premium appears as  a liability on the insurer's balance sheet, since unearned premium are paid back upon cancellation of the policy. 

For example, if your premium is $120 Paid-In-Advance for the year, aft7er 6 months (half of a year) the insurer will have "earned" only $60 of the $120 you paid. If you were to cancel your policy after 6 months, the insurance company would have to refund you $60 as they did not "earn" that amount.


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

Factors in Premium Computation

Eligible Expenses

Every business has expenses that must be paid and the insurance business is no different. Each health insurance policy an insurer issues must carry its proportionate share of the cost for employees, salaries, agents, commissions, utilities, rent or mortgage payments, maintenance costs, supplies and other administrative expenses.


Just as with life insurance, interest is a major element in establishing health insurance premiums. A large portion of every premium received is invested to earn interest. The interest earnings reduce the premium amount that otherwise would be required from policyowners.


The number and kinds of benefits provided by a policy affect the premium rate. The greater the benefits, the higher the premium. TO state it another way, the greater the risk the company, the higher the premium.


Before realistic premium rates can be established for health insurance, the insurer must know what can be expected as to the dollar amount of the future claims. The most practical way to estimate the cost of future claims is to rely on the claims tables based on past claims experience. Experience tables have been constructed for hospital expenses based on the amounts paid out in the past for the same types of expenses. Experience tables have also been developed for surgical benefits, converting various kinds of surgery based on past experience.

When determining the appropriate coverage and final premium rate for group health insurance, the insurer's underwriters will use the group's experience rating. An experience rating system is used to estimate how much a specific group will have to spend on medical care.


This concept requires health insurance providers to offer health insurance policies within a given geographical area at the same price to all individual or group plans without medical underwriting, regardless of their health status.


Whereas mortality rates show the average number of persons within a larger group of people who can be expected to die within a given year at a given age, morbidity rates show the expected incidence of sickness or disability within a given group during a given period of time.


As discussed earlier, experience has shown that health insurance claims costs tend to increase as the age of the insured increases.


Some types of work are more hazardous than others, the premium rates for a person's health insurance policy may be affected bye occupation. The same holds true for any dangerous hobbies in which the insured may participate.

Types of Receipts & Policy Delivery


The most common type of premium receipt is the conditional receipt. A conditional receipt indicates that certain conditions must be met in order for the insurance coverage to go into effect. The conditional receipt provides that when the applicant paus the initial premium, coverage is effective on the condition that the applicant proves to be insurable either on the date the application was signed or the date of the medical exam. If the applicant proves to be uninsurable as of the date of application or of the medical exam, no coverage takes effect and the premium is refunded.


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

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


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

Tax Treatment of Health Insurance Premiums & Benefits

  • Employer-paid premiums for health insurance are not included as part of an individual's taxable income. These premiums also are not tax deductible for the individual, however they may be tax deductible for the employer.
  • Typically any portion of group health insurance paid for by an employee is taken out of your paycheck before your income taxes are calculated. Since these premiums are paid with pre-tax dollars, they're already income-tax-free, meaning you can't claim them as a tax deduction.
  • Usually you cannot deduct the premiums paid on an individual health insurance policy, However, if your medical expenses including premiums paid exceed 10% of your adjusted gross income in any tax year, you may be able to take a deduction on the amount exceeding 10%.
  • With both individual and employer-sponsored group health insurance, you generally aren't taxed on the health insurance benefits you receive. This includes reimbursements for medical care.
  • Premium paid for personal disability income insurance are not deductible by the individual insured but the disability benefits are tax-free to the recipient.
  • When a group disability income insurance plan is paid for entirely by the employer and benefits are paid directly to individual employees who qualify, the premiums are deductible by the employer. The benefits, in turn, are taxable to the recipient.
  • If an employee contributes to any portion of the premium, the benefit will be received tax-free in proportion to the premium contributed.

Important Notes

  • The Premium Mode defines the frequency of the premium payments.
  • ANY changes in the insurance application MUST be initialed by the applicant.
  • HIPAA provides that the 10% excise tax for early withdrawal from IRAs will not apply to the extent of withdrawal is used for medical expenses that exceed 7.5% of the individual's adjusted gross income.
  • Tax qualified Long-Term Care premiums are considered a Medical Expense. IF a taxpayer's medical expenses exceed 7.5% of their adjusted gross income, Long-Term Care premiums are Tax Deductible.
  • Concurrent Review involves monitoring the insured's hospital stay to ensure everything is going according to schedule and that the insured will be released as planned.
  • The Gatekeeper strategy used by HMOs involves the process of obtaining referrals to specialists from primary care physicians.
  • Monitoring Length of stay, appropriateness of care and setting a hospital release date for a patient are examples of Utilization Review.
  • A Point Of Service (POS) plan is an example of Managed Care Plan.
  • S Corporations "Pass Through" their taxable income and losses to owners who then report their share of profits or losses on their own individual tax return. The owner can then Deduct 100% of all health insurance costs from their gross income.
  • If the business pays premiums as tax-deductible expense, any benefits paid will be fully taxable.
  • When assessing a Risk of Disability Coverage, health, gender & occupation are characteristics taken into consideration.
  • Premiums paid for Personal Disability Income Insurance are NOT tax deductible by the individual insured, but the disability benefits are tax-free to the recipient.
  • The Major Medical Indemnity Plan does NOT provide a form of "Managed care". 
  • Benefits that fall under a Major Medical Plan are considered to be a reimbursement for a loss, and is not taxable as income.
  • When determining the appropriate coverage and final premium rate for Group Health Insurance, the insurer's underwriters will use the group's experience rating. An experience rating system is used to estimate how much a group will have to spend on medical care.

* 1935 Social Security Act : Created to provide for United States citizens general welfare who are 65 years of age and older. The Act was enacted by the Senate & House of Representatives of the United States to enable individual states to make more adequate provisions for furnishing financial assistance to the aged, blind, dependent and crippled children, maternal and child welfare, publish health and to establish more adequate provisions for the administration of their unemployment compensation laws,

* 1868 Paul v. Virginia : This case, which the U.S. Supreme Court decided, involved one state's attempt to regulate an insurance company domiciled in another state.

* 1944 U. States v. SEUA : In the Southeastern Underwriters Association case, the Supreme Court ruled that the insurance industry is subject to a series of Federal Laws, many of which conflicted with existing state laws. As such, insurance is a form of interstate commerce to be regulated by the federal government.

* 1945 McCarran-Ferguson Act : This law made it clear that the states continued regulation of insurance was in the publics best interest. However, it also made possible the application of federal antitrust laws to the extent that [The insurance business] is not regulated by state law.

* 1958 Intervention by the FTC : In 1958 the Supreme Court held that the McCarran Ferguson Act disallowed such supervision by the FTC, a federal agency. Additional attempts have been made by the FTC to force further Federal Control, but none have been successful.

* 1959 Intervention by the SEC : The Supreme Court ruled that Federal securities laws applied to insurers that issued variable annuities and, thus, required these insurers to conform to both SEC and state regulations. The SEC regulated variable life insurance.

* 1868 Paul v. Virginia : This case, which the U.S. Supreme Court decided, involved one state's attempt to regulate an insurance company domiciled in another state.

* 1970 Fair Credit Reporting Act : Requires fair and accurate reporting of information about consumers, including applications for insurance. Insurers must inform applicants about Any Investigations that are being made upon completion of the application.

* 1994 U. States Code (USC) Section 1033 & 1034.
According to 18 U.S.C. 1033 & 1034 : It is a criminal offense for an individual who has been convicted of a felony involving dishonesty or breach of trust to willfully engage or participate (in any capacity) in the business of insurance without first obtaining a "Letter of Written Consent to Engage in the Business of Insurance" from the regulating insurance department of the individual's state of resistance.

* 1999 Financial Services Modernization Act. :  In 1999 Congress passed the Financial Services Modernization Act, which repealed the Glass Steagall Act. Under this new legislation, commercial banks, investment banks, retail brokerages and insurance companies can now enter each other's lines of business.

* 2001 Uniting & Strengthening America by Providing Appropriate Tools Required to Intercept & Obstruct Terrorism Act. : The Patriot Act, which amends the Bank Secrecy Act (BSA), was adopted in response to the September 11, 2001, terrorist attacks. The Patriot Act is intended to strengthen U.S. measures to prevent, detect, and deter terrorists and their funding. The act also aims to prosecute international money laundering and the financing of terrorism. These efforts include anti-money laundering (AML) tools that impact the banking, financial, and investment communities.

* 2003 Do Not Call Implementation Act. : The Do Not Call Registry allows consumers to include their phone numbers on the list to which telemarketers cannot make solicitation calls.

* 2010 Patient Protection & Affordable Care Act (PPACA) : Often shortened to the Affordable Care Act (ACA), it represents one of the most significant regulatory overhauls and expansions of health insurance coverage in U.S. history.

Personal Notes From: Michigan Pre-licensing Education - Life, Accident and Health Insurance course has been approved by the Michigan Department of Financial Services as meeting the mandatory 20-hour requirement for Life and 20-hour Requirement for Health | XCEL Solutions LLC. Provider ID#: 0950 Course ID#: 60731/60732

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