Application, Underwriting, Policy Delivery and Contract Law — practice questions

15% of the exam ≈12 real questions 16 free questions here

Completing the application, underwriting, delivering the policy and contract law: 12 of the 80 scored questions. The Life Agent outline puts the elements and characteristics of the insurance contract here.

Where people lose points

• For life insurance, insurable interest must exist when the policy is applied for, not at death.
• Aleatory means unequal and contingent; unilateral means only the insurer makes an enforceable promise; adhesion means the insurer drafts it.
• An insurer may not decline an applicant on an MIB report alone.
• With a conditional receipt, coverage starts at application only if the applicant proves insurable as applied for.

Questions and answers, explained

All 10 questions above, with the correct answer and why it is correct. Everything here is on application, underwriting, policy delivery and contract law.

1. During underwriting, an insurer receives coded information about an applicant from the Medical Information Bureau (MIB). Which statement about the MIB is TRUE?

   • AIts reports come directly from treating physicians, who are required to send patient records
   • BIt is a nonprofit member organization that exchanges coded underwriting informationCorrect
   • CAn insurer may decline an application based solely on information in an MIB report
   • DIts report eliminates the need for an attending physician’s statement entirely

   Why: The MIB's information comes from prior applications submitted to member insurers, and its purpose is to alert underwriters to discrepancies that deserve further investigation. An insurer may not decline or rate an applicant solely on MIB data — the information must be verified through other sources, such as an attending physician's statement.

   Reference Texas outline #124401, general section IX (Field underwriting procedures)

2. An applicant submits her application with the initial premium and receives a receipt stating that insurance takes effect on the date the insurer approves the application. She completes her paramedical exam on May 5 and dies on May 12. The home office approves the application on May 14. What will the insurer pay?

   • AThe face amount, because approval did in fact occur
   • BThe face amount, because she was insurable on the date of the exam
   • CNothing beyond a refund of the premium paid, because she died before the approval dateCorrect
   • DHalf the face amount, prorated to the date of death

   Why: Under an approval-type receipt no coverage exists until the insurer actually approves the application, so death before that date means no contract ever came into force and the premium is returned. Choice B describes an insurability-type conditional receipt, which would relate coverage back to the later of the application or exam date — a different receipt with a different trigger. Outline III.B.

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

3. When a life insurance policy is backdated to "save age," which statement is correct?

   • ABackdating is generally limited to about six months, and the owner must pay the premiums covering the backdated monthsCorrect
   • BBackdating may go back any length of time as long as the applicant consents in writing
   • CPremiums for the months preceding the application are waived by the insurer
   • DBackdating lowers the premium rate and pushes the start of the contestable and suicide periods forward to the application date

   Why: Insurers will move a policy's effective date back — as a rule no more than six months — so the premium is computed at a lower insurance age; the tradeoff is that the owner must fund the skipped modal premiums up front. Choice C is the common misconception: those back premiums are due, not waived, so backdating only pays off when the rate saving exceeds them. Outline III.A — completing the application.

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

4. An applicant receives the required notice that an investigative consumer report has been ordered and writes to the insurer asking exactly what is being investigated. Under the Fair Credit Reporting Act, the insurer must make a complete written disclosure of the nature and scope of the investigation within:

   • A3 days of the applicant’s written request, excluding weekends and holidays
   • B5 days of the request, or of the date the report was ordered, whichever is laterCorrect
   • C15 days of the request, or of the date the policy was issued, whichever comes first
   • D30 days of the request, measured from the postmark on the applicant’s letter

   Why: FCRA sets two different clocks: the written notice that an investigative consumer report was ordered is due no later than three days after the report is requested, and the complete nature-and-scope disclosure is due within five days of the consumer's written request or the report request, whichever is later. Choice A applies the initial-notice deadline to the wrong duty. Outline III.C — sources of underwriting information.

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

5. Which feature is required for a valid HIPAA authorization allowing a life insurer to obtain an applicant's protected health information?

   • AIt must describe the information, identify who may disclose and receive it, state a purpose and expiration, and be signedCorrect
   • BIt may be an open-ended, permanent release with no expiration date, provided the applicant may revoke it in writing at any time
   • CIt must be notarized and witnessed by someone with no financial interest in the policy being applied for
   • DIt must be signed by the applicant’s treating physician as well as by the applicant before any records are released

   Why: HIPAA requires a specific, signed, dated authorization with a defined scope, named parties, stated purpose, and an expiration date or event before protected health information may be released to an insurer. Choice B describes a blanket release, which HIPAA expressly does not accept; notarization, choice C, has never been a HIPAA requirement. Outline III.C — privacy in underwriting.

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

6. When the agent arrives to deliver a policy, the applicant mentions that she was hospitalized last week for chest pain — after the application was signed, and no premium was paid with the application. The agent should:

   • ADeliver the policy and collect the premium, since the insurer already issued the contract
   • BDeliver the policy but tell the client to notify the insurer herself
   • CNot deliver the policy or collect the premium, and report the change in health to the insurer for further underwritingCorrect
   • DCollect the premium and hold it uncashed until the insurer responds

   Why: The insurer's offer rested on the applicant's health as represented; a material change before delivery must go back to underwriting before the contract is completed. Choice D is the tempting wrong answer — accepting the premium at all, even uncashed, can be treated as completing acceptance and binding the insurer to a risk it never evaluated, and it exposes the agent to discipline for handling the transaction improperly. Outline III.D.

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

7. Under the Gramm-Leach-Bliley Act (GLBA), when must an insurer provide a customer with a notice describing its privacy practices and information-sharing policies?

   • AWhen the customer relationship is established and annually thereafterCorrect
   • BOnly when the customer requests a copy in writing
   • COnly if the insurer intends to share information with its affiliates
   • DWithin 10 days after the policy is delivered

   Why: GLBA requires an initial privacy notice when the customer relationship is established (such as at policy issue) and, as a general rule, an annual notice for as long as the relationship continues. The notice must describe what nonpublic personal information is collected and shared, and customers must be given the opportunity to opt out of sharing with nonaffiliated third parties. The notice is mandatory — it is not triggered only by a customer's request or by a plan to share data. Outline III.A (GLBA privacy).

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

8. An applicant with a chronic but well-managed health condition is approved for life insurance, but at a premium higher than standard rates. This applicant has been classified as which type of risk?

   • APreferred risk
   • BStandard risk
   • CSubstandard (rated) riskCorrect
   • DUninsurable (declined) risk

   Why: Substandard risks present a higher-than-average likelihood of loss, so the insurer accepts them only with a rated (extra-premium) policy, a flat additional charge, or other modifications. Preferred risks pay less than standard rates because of superior health and habits, and a declined risk receives no offer of coverage at all — this applicant was accepted, just at a higher price. Outline III.B (risk classification).

   Reference Texas outline #124401, general section III (Completing the application, underwriting and delivering the policy)

9. A business wants to buy a life policy on its top salesperson. When must the business have an insurable interest in her life for the policy to be valid?

   • AAt the time of her death, even if she left the company years before
   • BBoth at application and at death, or the claim is void
   • CNever, as long as she signs the application
   • DAt the time the policy is applied forCorrect

   Why: For life insurance, insurable interest must exist when the policy is applied for; it need not exist at death. A business has an insurable interest in a key employee whose death would cause it financial loss, and the employee's consent is also required.

   Reference Texas outline #124401, general section IX.H.2 (Insurable interest)

10. Investors pay a 75-year-old to take out a large life policy, naming them as owners and beneficiaries soon after issue, though they have no relationship to him. This arrangement is:

    • AA legitimate life settlement
    • BA viatical settlement made by a terminally ill insured who sells an existing policy
    • CStranger-originated life insurance (STOLI)Correct
    • DKey person insurance

    Why: STOLI (or IOLI) is a policy initiated for the benefit of investors with no insurable interest in the insured, often with the premium financed by them and ownership transferred soon after issue. It is designed to evade the insurable-interest requirement. A legitimate life or viatical settlement sells an existing policy the owner bought for a real need.

    Reference Texas outline #124401, general section III.B.5 (STOLI/IOLI)

Topics inside this domain

• Life insurance contract law: elements and characteristics

Drill other domains

• Types of Life Policies and Annuities (18.75%)
• Life Policy Riders, Provisions, Options and Exclusions (18.75%)
• Retirement and Other Insurance Concepts (10%)
• Texas Statutes and Rules Common to Life and Health (25%)
• Texas Statutes and Rules — Life Insurance Only (12.5%)

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