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 theorder they are presented.

EI Memorize all key points.

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

The Lawand Llfe lnsurancelntroduction

-{ life insurance policy is a contract and, as such, is subject to theprovisions of canadian law. It is essential for the agent to understandthat it is law that determines many elements of the contract, not theinsurance companies. Law mandates who can enter into a contract, basicelements of a contract, contract requirements and provisions, consumerprotection, and what constitutes a mistake, fraud, or an insuranceot-fence, among many other aspects.

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

ln this module:

LESSON 1=

LESSON 2:

LESSON 3:

LESSON 4:

LESSON 5:

LESSON 6:

LESSON 7:

Forms of Law i

Life Insurance Contracts

The Definitions of lnsurance

Life lnsurance Contract Requirements

The Two Forms of the lnsurance Gontract

Elements of the lnsurance Gontract

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

benefi crary .

beneJiciary: the person who

receives all amounts payable

when the contract holder dies.

common law: the law which

comprises the bulk of law inCanada with the exception of the

Province of Quebec. Common

law is based on custom and usage

dating from ancient unwritten

laws in England and which were

collected together and established

as the Common Law of the

Realm. Also known as case law.

consideration: a part of a contract

which indicates the exchange of

value.

effective dute: the date upon which

the policy takes effect and the

coverage starts.

face amount: the amount of the

insurance payable.

insuruble interest: when the death

of the insured would be

detrimental or cause harm to the

person taking out the insurance.

insured: the person who is the

owner (policy owner) of the

policy and pays its premium.

joint Jirst/lust to die: a contract in

which more than one life is

insured and settlement is made to

either the survivor (first to die) or

the benefic:^airy (last to die).

lW insured: the person whose life

is insured by the life insurance

contract.

minors: individuals who have not

reached the age of majority as

defined in the province where

they reside.

personul contract: a contract ln

which the insured and the life

insured are the same.

premium: legally, the consider-

ation for the contract; in other

words, the payment required to

bring the policy into force and to

keep it in force.l

I

t') t)

settlement: the amount paid to the

benefi ctary when the life insured

dies.

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.

Module 2: The Law and Life Insurance

third pur$ contract: a contract in

which'the insured insures the lifeof another person (the lifeinsured).

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

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LESSON 1: Forms of Law

In Canada, with the exception of the Province of Quebec, Common Law

comprises the bulk of law. Common Law has its origins in England and is

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 long-

established 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

principle in similar cases in other courts. If a higher court makes a decision in

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 simple contract

/a specialty contract (i.e. contracts under seal)

A Simple Contract

A simple contract can be enforced as long as it meets certain requirements.

These requirements are that there must be an olfer and acceptance (known as

mutual assent or bargain) between the parties entering into the contract. There

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 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.

Tort Law: Tort means 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 civilbehaviour. 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.

How are

Criminal Lawand Tort Lawdifferent?

Criminal law punishes those who have committed offences

under the Criminal Code of Canada.

Tort law focusses on those who have suffered injury or

damage as a result of criminal or non-criminal conduct, and

on their compensation for losses that arise from such conduct.

Classification of Contracts: A contract may be deemed to be void,

v oidable, or unenforceuble.

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

back to the way it was before the contract. 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

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

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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

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.

The person whose life is insured (the 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).

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.

This LESS0N is

fundamental to

understanding the

structure of

insurance.

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A third purty contract ts one in which a person

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. Theparties to the contract would be James as the insured andpolicy 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

rnsured upon the death 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.

What is Joint First to Die?James and Jane Dandy take out a $100,000 joint first to diewhole 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.

Module 2: The Law and Lrfn Insurance

(the insured) insures the life of

fhe Uniform Life lnsurance Act legislates individual life insurance

contracts in all of Canada except the province of Quebec.

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, ordelivered within Quebec. The Civil Code continues to apply if a

policyholder moves from Quebec to another province or territory.

T-he

l-egfs lation

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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 00,000 death benefit.

All 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

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

of annuities and segregated funds.

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

the death of the life insured to the beneficiary.

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

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

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).

All insurance policies pay

a benefit. A death benefit

is typically a lump sum

payment. A disability

benefit is paid as monthly

income. An A&S benefit is

a lump sum

reimbursement. An

annuity benefit is a series

of payments.

L

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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 fromother types of contracts because of the intervention of the Unifurm LifeInsurance Act and the Civil Code. These statutes establish that a life insurance

contract does not come into effect until payment of the initial premium ismade, and there has been no change in insurability between the time ofapplication 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 insurancepolicy from his friend Phil Saccharine. The application wasforuvarded to the insurer, Hazards Ltd. (Hazards), who issued astandard policy and forwarded it to Serge for delivery. Prior tothe delivery, Phil informs Serge that he has been diagnosed asa diabetic and is receiving ongoing treatment. He furtherconfirms 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 therisk in the insurance, and if H azards accepts it, a new policy willbe issued at a higher (rated) premium. He should indicate toPhil that a new cheque will be required for the amount of theincreased premium. Serge sends the original policy back toHazards, along with the doctor's report. ln the event thatHazards accepts the risk, a new rated policy will be issued and

sent to Serge for delivery. When delivering the policy, Sergemust be certain that Phil signs a receipt acknowledging the newpolicy 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 itwas 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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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:

/ a legal capactU to contract

/ a"meeting of the minds" between the parties to the contract

/ a lawful object of the contract

Legal GapacitYLegal 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'

Meeting of the MindsMeeting of the minds means that the parties have agreed to all the details of

the contract. There can be no meeting of the minds when one or both of the

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

enforceable contract has not been formed. Although mistakes, as far as

contract law is concerned, can occur in several forms, only those mistakes

Who ts a

Minor?

A minor is defined as one who has not reached "legal age," or

"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.

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which are fundamental to the intent of the contract (such

below) and which would have affected the decision of the

the contract, are considered to be sufficiently serious to

invalid.


as those described

parties to enter into

make the contract

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 thepolicy 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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A 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

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

induced by a material misrepresentation remain in full force and effect unless

and until they are invalidated. A material misrepresentation may arise from an

untrue disclosure or non-disclosure'

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

fraud will terminate

a contract no matter

how long the policy

has been in force!

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knowledge of the parly making the misrepresentation. If 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 life insured's true age.

What is Utmost Good Faith?The contractual concepts of mistake and misrepresentationare very important considerations when dealing with lifeinsurance agreements since these contracts rely heavily on theinformation provided by the applicants. Accordingly, theacceptance 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

insured would risk a loss or fail to realize a benefit from a probable gain upon

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

someone without

with a valid insurable interest and then assigned to

an insurable interest is valid and enforceable.

In the absence of an insurable interest, insurance contracts are voidable ' A lack

of insarable interestmeans that the person taking out the policy cannot make a

claim against the insurer for payment of the policy benefit or receive the

premium money back.

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Module 2: The Law and Lrfn Insurance

LESSON 5: The Two Forms of the lnsurance Contract

There are two forms in which a policy may be issued:

/ atemporary insurance agreement, or/ the policy

Temporary lnsurance Agreement (TIA)

Some insurance agents have the authority to issue a conditional or temporaryinsurance agreement (TIA). The agreement is issued after the agent has

completed the insurance application and issued a receipt for the initialpremium payment. A temporary insurance agreement puts insurance in place

trn the life insured while the policy is being prepared; it bridges the gap

benveen application and final policy.

Once a 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 forpavment 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 isruspected 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 used for a 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 are set out in the contract. There is no opportunity for negotiation.

-he only documents considered tobe evidence of the contract - and which::,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).

-: 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.

An agent has the

authority to issue a

TlA. You'll learn more

about authority in

module 4.

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The amount, type of insufance, and premium cost are set out in the application.

In the event of any contradiction between the information set out in the

application and the policy, the policy will prevail over the application'

The face puge, ot schedule of the policy as well as the insurance application

describes the basic components of the policy. Among other details, the

schedule includes:

the basic Promise of the PolicY

the consideration

the execution portion of the policy

the effective date of the PolicY

other details

Basic Promise'.The basic promise in the policy identifies the life insured, the

amount of the insurance payable (the face amount), when and where that

amount is payable, and to whom it is payable'

The Consideration (premium detaits):The premium details of the face page

sets out the amount and method of payment, as well as the frequency and

duration of premium payments. It also provides a breakdown of the premium

when riders are attached to the policy.

Execution Portion: The execution portion of the policy confirms the date of

issue of the policy, not the effective date of the contract, and when signed by

officers of the insurance company, finalizes the contract of insurance.

Effective Date: The effective date of the policy is the date that the policy

takes effect and coverage starts. The policy does not go into effect until it has

been delivered to the insured, the initial premium has been paid, and it has

been determined that there has been no change in the insurability of the life

insured between the time the application was received and the policy

delivered. The policy owner must sign a delivery receipt and, in some cases,

the agent witness the signature. At that point, insurance is in force'

After the policy has been delivered, the policy owner has a statutory 10-day

period to consider the contract. This is called the rescission period' During this

period, the policy ownef can decide to cancel - or rescind - the policy and

receive a refund of the premiums paid'

The death benefit

will not be paid if

death occurs by

suicide within two

years of the

effective date.

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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 itspayment

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 ofrhe policy owner include:

/ suicide exclusion clause

/ conversion privilege/ age adjustment

/ premium payments

/ loans

/ reinstatement privilege/ incontestability clause

Suicide Exclusion Clausel-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 Privilegel:is clause allows convertible term insurance policies as well as policies with::=mr insurance riders to be converted to permanent life insurance without.'. idence 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.

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

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Age AdjustmentThis 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

premium payments act to keep the policy in

paid either:

monthly,

quarterly,

semi-annuallY, or

annually.

application, while subsequent

effect. Insurance premiums are

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.

ReinstatementThe reinstutement clauses in the policy are designed to assist when a life

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.

I

l

I

A policy will lapse

if the premium is

not paid before the

end of the grace

period.

When the

policy has

lapsed, it can

be reinstated

within two

years.

2-t8

Module 2: The Low and Life Insurance

lncontestabilityProvisions 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 sfb beneficiary of a life insurance policy is designated in the application. Ameficiary can be:

the insured's estate

a person or persons

a class of persons

a business

a tnrstee

a minor

Remember: there

are six types of

beneficiaries.

2-19


N.B. It is important to select the most appropriate beneficiary when the

contract is being drawn up and then, regularly review who has been

appointed to see if a change should be made. I

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.

In order to designate 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

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.

If 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

2-20


have died intestste and the disposition of the insurance proceeds will be

according to the law of intestacy.

A Class of Persons as Beneficiary: It is appropriate to name a class ofpersons as beneficiary so that 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 wheninsurance is put in place on the lives ofshareholders in a business, partners, orthe life of a key peruon in a business. Insurance funds allow for an orderlyt-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 mentallyrncompetent.

C/asses of BeneficiariesThe four primary classes of beneficiaries were altered bylegislation 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, thistype 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.

2-27


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

i rrevocable beneficiarY.

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,

of the policy owner's estate

and continues to be, the designation

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.

However, if 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

of majority in the province of his or her residence.

N o n - F o rfe itu 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),

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-

forfeiture, the policy ownel is able to determine the cash surrender value of

the policy, andlor the cash equivalent value in the policy that may be applied

towards the options.

L-

2-22


Settlement OptionsThe life insurance contract is "settled" when the life insured dies. The

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

- a lump sum payment

an interest option

an installment option

a life annuity option

\.8. The settlement option may be chosen by the policy owner. If an option

has not been specified, it may be selected by the beneficiary upon the

death of 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.

2-23


Protection from CreditorsDuring 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

irrevocable beneficiary under the policy. In Quebec, a divorce or marriage

annulment automatically cancels the appointment of a spouse as a beneficiary.

When a Couple

Sepa rates

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

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.

L-

2-24


AssignmentAssignments result 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.

Policy ownership includes the rights to:

enter into a contract

name the beneficiaries

modifi' the contract

access the value within the policy in the form of loans or withdrawals

terminate the policy, which can be done on a unilateral basis

assign the policy on a collateral or absolute basis

-\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 policy is assigned to a financial institutionas security 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 toihe 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 thepremium payments, and usually the insurance company is obliged to inform:Lre lender if the policy owner defaults on any premium payments. This willellow 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.

For a collateral

assignment to be made,

there must be an

expectation of profit.

2-25


LESSON 7: lnsurance Offences and Remedies

In canada, the power to make criminal law is exclusively federall however, the

provinces have the right to designate offences related to property and civil

rights. under this umbrella, a number of provinces have provisions dealing

with unfair or deceptive trade practices. These include the inflating of prices,

taking advantage of l,ulnerable consumers, and suspect telemarketing schemes'

Although these offences are less serious than those under the criminal code,

fines can be as high as $100,000, with imprisonment of up to three years.

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.

Finally, theft may also occur by the agent who steals premiums

or the policyowner who makes a false claim'

2-26

Module 2: The Law and Lrfe Insurance

The FIow of Insurance Fraud

Insurance Agent

Erample: if an insurance agent uses an advertisement that promotes a product

rr 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-rreov€r, 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,

:: Lrffence under the Criminal Code, andlor commingling which, in itself, is an

- =nce in most jurisdictions.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, in addition to the required $2 million aggregate coverage for:rrr-rrS 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 insurance agents including'':-;iary duty and fraud are provided in module 4.

lnsured

Errors and

omissions

protects

loa !

2-27


A Case of Theft, Fraud and ForgeryBob 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 ofAges 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.

L.

2-28


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

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

He has committed an act of forgery in order to perpetrate thefraud 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 theirown 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.

2-29


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'

2-30


Take time 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 contractirrevocably.

A TIA puts insurance in place while the contractprepared; it is a temporary policy that binds the insurerthe insured.

The policy goes into force when it has been deliveredthe insured, the first premium paid, the policy receiptsigned by the insured, and it is witnessed by the agent.

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

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

The incontestability clause states that the contractcannot be contested by the insurer (in the absence ofmaterial misrepresentation), when it has been in effectcontinually for a period of two years after the issue orreinstatement date

The policy owner has a grace period of 30 or 31 daysfollowing the premium date in which to pay the premium. lfthe premium is not paid, the policy lapses. The policyowner then has a period of two years to reinstate thepolicy. He or she must pay outstanding premiums, anyinterest owed, and provide evidence of insurability.

When the estate is named as beneficia ry, there is nocreditor protection of the proceeds of the policy.

IS

to

to

is

2-31


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.

2-32

2bTHE LAW AND LIFE

'NSURANCE:Ca,se StudiesThis module describes some

standard c on tr act provi sions

ln this module:

1: Right of Rescission

2: Entire Contract

3: Suicide Exclusion

4= lncontestability

5: Grace Period

6: Reinstatement

7: Smoking Status

8: Misstatement

9: Settlement Options

1 0: Fraudulent Misrepresentation

scenarios you might encounter as a life agent and how the

apply.

LESSON

LESSON

LESSON

LESSON

LESSON

LESSON

LESSON

LESSON

LESSON

LESSON

This gives you a chance to

put theory into practice!

Reading the case studies is

an essential part of the

c0urse.


"fraud: is a fraudulent misrepresentation

:rtended to cheat or deceive. Fraud is only

; rnsidered a criminal offence when

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

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.

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.

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.


muteriul misrepresentution: a misrepresent-

ation 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.

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-

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.

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.

reinstutement: a clause in the policy

designed to assist when a life insurance

contract lapses due to premium non-

payment.

For all the key terms for this, and all modules, please see theGlossary 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 outshopping. He read an article in his daily paper that did a tremendous job explaining thebenefits of life insurance. So as not to procrastinate, he looked up a life agent, ClaireMackinnon, in bis local Yellow Pages and made an appointment with her for thefollowing Wednesday evening.

When Martha returned from shopping, she and Gerald wasted no time in getting at theweekend 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 topurchase 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 whileMartha still slept. He failed to inform Martha of his insurance application.

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

Martha reminded George that they did not need personal policies because they wereboth members of a group plan at work and that the group insurance included ample lifecoverage. The next day, when Claire returned with the policy for Gerald to sign, Geraldcancelled 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. Thebeneficiaries of the policy were their children, Carol and David.

Carol found the policy when she was clearing through Margaret's things. The deathbenefit 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 company claimed that the policy application was for $10,000 and premiums had

been paid on that basis. The fact the sum insured on the policy was $100,000 was

erroneous; they refused to make further payment'

carol and David sued the company for the balance of the death benefit in the policy'

The court considers only the application and the policy as the entire contract' A mistake

had been made, but the facts of the policy prevail over that of the application' Thus'

Carol and David were able to receive the $100,000'

N.B, The application and the policy are the only evidence of the contract' when there is

a discrepancy between the two, the information in the policy prevails'

LESSON 3: Suicide Exclusion

Life agent Claire Mackinnon met with Edgar Poe on November 12 last year' Edgar

seemed well established with a lovely home and happy family so it seemed likely he

would be considering life insurance as income protection in the event of his premature

death.

Somewhat surprisingly to claire, Edgar decided on a one-year term policy, non-

renewable, with a $2 million face value and an accidental death rider' For all intents and

purposes, Edgar was covered with $4 million in life insurance. Edgar designated his wife

as beneficiary. He paid the annual premium, $3,760. with his application'

on January 10, Edgar's wife called claire to inform her that Edgar had died when his car

crashed into a tree. claire contacted the authorities to determine the circumstances of

the crash: it was a beautiful sunny day, clear driving conditions, and Edgar had been

driving his small compact instead of the SUV. The police declared the accident as

intentional and Edgar's death suicide'

There would be no death benefit from the policy and the insurance company returned

the premium to the widow.

N.B. The suicide exclusion clause prevents a death benefit to be paid within a specified

period, usually two years, when the cause of death is suicide' The premium is

returned.

I

2b-4

Module 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 thei 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 effectcontinually 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


After paying the premium, he switched to a preauthorized payment plan to ensure his

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

Let us continue the story of John Parker (above), only in this case John takes the

summer off to explore the Yukon. on his return, he finds his premium notice - which of

course has remained unpaid during his extended absence - and confirmation that his

policy has laPsed.

John immediately reapplies for reinstatement of his policy' He must pay the overdue

premium and provide evidence of insurability' Fortunately, his health had not

deteriorated significantly since he first applied 14 years previously. The insurer agrees to

reinstate the policy. He again faces the two-year suicide exclusion period and two-year

contestability period because this is required in a reinstated policy.

IV.B. To reinstate the policy, the owner must pay all overdue premiums, any

indebtedness, and provide evidence of insurability to the insurance company. lf,

and when the contract is reinstated, both the two-year contestability and the two-

year suicide exclusion periods begin anew'

LESSON 7: Smoking status

Tommy Hofflinger recently received the renewal package for his auto policy' lncluded in

the material was an invitation to buy term life from the insurer. The only requirement was

for him to complete a brief application and return it to the company' They would deduct

the premium ($32.15) from his account monthly'

Tommy filled in the application and requested $50,000 in term coverage and declared

himself a non-smoker. As far as Tommy was concerned, it was a little white lie - and,

anyway, he was going to quit next year. He named his partner, Frank, as beneficiary'

Six months after the policy was issued, Tommy died from a rare form of pneumonia' The

autopsy results declared Tommy as a smoker'

L

2b-6

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 afraudulent misrepresentation, a serious offence in the life insurance application process,and his application deemed fraudulent. Frank's claim as beneficiary of the policy wasdenied on those grounds.

N.B. A false declaration of smoking status is one example of a fraudulentmisrepresentation. lt is an intentional effort to defraud the insurer. Fraud is a basison 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 remain39 forever. when he turned 42,he applied for and received a standard rated 9100,000whole life insurance policy in which he named his trusted employee, Rochester, asbeneficiary. His application stated his age as 39. when Jacques died at age 70, thelnsurer 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 ofinsurance. Had he been assessed as a 42-year-old, his premium would have been g27per $1,000 of insurance. What benefit will Rochester receive?

The calculation is: premium charged + premium that should havevalue of the policy. Therefore, Rochester will receive . 23 + 2T =s92 ,592.59

been charged x face

0.9259 x $100,000 =

LESSON 9: Settlement options

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

Lump sum paymentThis option suits Roger if Roger has a need for immediate cash and the financialresponsibility to dealwith a sudden windfall. The principal ($100,000) is paid in onepayment.

lnterest onlyThis 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


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

withtheinsurerinsteadofarrivinginalargepayment.

On the other hand, this

and had no immediate

option is also a good one if Roger was independently wealthy

need for a lump sum of cash'

lnstallmentlf Roger was a special needs child who had no prospects

option that pays both interest and principal would provide

principal was exhausted. lt pays more on a regular basis

for earning an income, this

an income to Roger until the

than interest onlY.

i

Life annuitY

Using this option means that the insurance company uses the $100'000 to purchase a

life annuity for Roger. Roger will again receive a permanent income which is suitable if

he has need for a steady payment over his lifetime'

LESSON 10: Fraudulent misrepresentation

DavidSmeehasbeendiagnosedwithprostatecancer.Thedoctorinformshimthatheislikely to live five years, maximum. David, who has no insurance, immediately applies for

a 10-year renewable term policy. He does not reveal that he has cancer' when he dies'

nineyearsafterdiagnosis,medicalrecordsrevealtheexistenceofthecancerpriortoDavid's aPPlication'

The insurance claim is denied because of the evidence of fraudulent mis'

representation. David deliberately, knowing his application to be false' and with the

intent of deceiving the other party made a fraudulent representation' Fraud will always

void a contract regardless of the number of years it has been in force'

N.B. An innocent or negtigent misrepresentation is a false representation made

without the intent to deceive the other party'

2b-8

Underwrltingand 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.

: :,"r are 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.

': : -: 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. Youlr-,riNt?nd that what you have accomplished is the end result of the

u:,:lnvriting and claims process - the focus of this module.


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


claimant: the person or legal entity

that is claiming the benefit from

a life insurance policY.

co-insurance factor: a Percentage

of the costs that the insured PaYs.

deductible: an amount the insured

pays before payment is received

from the insurer.

exclusion rider: a rider that

excludes some coverage.

gross premium: the net Premium

of a policy plus the expense load.

mortality rates: the number of

people expected to die at a given

zga, based on 1,000 PeoPle of the

same age.

the key terms forsee the Glossary

net death beneJit: the face value of

the policy plus any extras the

policy owner may be entitled to

receive.

reinsurance: part of the risk that is

passed along to a reinsurer: if the

retention limit is exceeded.

substandard risk: a tatrng assigned

to some life aPPlicants who are

at high risk for some reason.

underwriting.' the Process of

assessing and classifYit g the

potential degree of risk that a

proposed insured rePresents to an

msurance company.

For allpleasebook.

this, and all modules,at the beginning of the

I\

3-2

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 lnsuranceAs 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

due upon the death of the 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'* 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 premiumsoender, 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

aaJ.J


Health insurance such as a disability income replacement policy places

considerable weight on the details of an applicant's motivation, stability, and

claims history.

Motivution is determined as the readiness the applicant is likely to display to

fetum to work afler a claim; those who are highly educated or better trained

have higher levels of motivation.

StabilitJ, is measured

applicant has worked

residency (how long he

in both the applicant's occupation (how long the

in that occupation or for the same employer) and

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

risk. The questions relate to the medical history of the life insured and the life

insured's family to enable the undetwriters (that is, the insurance officials who

assess risks) to determine whether certain medical conditions are likely to be

hereditary in nature. This section also requests information on any drug or

alcohol usage, motor vehicle infractions, criminal and related convictions that

may signal dependency or addiction.

Affirmative answers.' Although most questions in this section are answered

With an affirmative, "yes," Or negative, "nO," any qUeStiOn answered in the

affirmative requires a detailed explanation. It is the information contained in

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

may be obtained in a variety of ways. The application form authorizes the

insurance company to forward an "Attending Physician's Statement" directly

to the family doctor of the proposed life insured. The insurance company pays

for a report from this physician that contains details of the life insured's

medical history (i.e. previous illnesses, operations, treatments, and current

condition and medication). This report is forwarded directly to the insurance

company by the family doctor. The insurance company may also request other

information, including an Inspection Report, a Drug and Alcohol

Questionnaire, or a Hazardous Sports and occupations Questionnaire.

3-4


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 ortrther 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.

ht B 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;l;:JSe. Underwriters can then receive information from the database to assist

n :s-ressing the insurance risk; however, the insurer cannot use MIBn - -:::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

iLlnd -:surer that further information should be obtained. The MIB does not

11*' , -Je copies of doctor's reports or test results.


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

This part of the application will detail exactly what the applicant has agreed to

purchase. The agent must have thoroughly presented beforehand all options to

the applicant including advantages and disadvantages of the proposed

purchase. The application will include details on the type of policy and any

riders or other benefits.

It is also essential that the agent review this information carefully; a policy

mistakenly issued for $500,000 instead of $50,000 may be binding on the

insurer, although the insurer may seek damages from the agent. This will be

true of other errors as well.

Sources of lnformation for the Application

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

iI

I

It

l'ledical details are

part of the

information about the

insured l<nown as

"evidence of

insurability."

A two-party contract(applicant is the sameperson as life insured)

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

Personalinformation

provided by aPPlic arfi provided by aPPlic ant and

life insured

Medicalinformation

provided by aPPlicant provided by life insured

Details of theproposedinsurance Prolgct

provided by agent;

understood bY applicantprovided by agent;understood bY apPlicant

3-6

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 ApplicationI:: 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 ofr].:':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 alln: :::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,':: .-an be significant fallout resulting from an agent's breach of duty tor"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 inr.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.

,,1r1$llir i::6-,5:5S fhe Stgn atU fe

*"l i: ;-tent secures and witnesses the

-iT'r ; inl (if a third party contract) on

rllr; -. -rtJfLlre is an acknowledgement

;ir ;::non is both true and accurate.

signature of the life insured and the

the application. This is essential since

that the information contained in the

lfr:'. the First Premium to Substantiate the Temporary lnsuranceu;r'zenent (TIA)-r.: :i3rrt must also obtain the first premium payment from the applicantri;:r'r -:r standard rates and subject to certain limits. This initiates coverage

" rl":* : TI-\ is issued.

You, as the agent,

have an important

role in undenvriting.

3-7

ffi

I


The first premium should not be collected if there is a suspicion that the policy

will carry premiums that will be higher than standard rates.

Reporting on the Applicant

As we have seen, the agent is responsible for collecting a large amount ofpersonal 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 ce Ag ree ment (T I A)

Issued by 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 places the insurer at risk (subject to certain limitations), because the

policy has not been approved nor issued. An agent should only issue a TIA ifhe or she believes that the proposed life insured is "insurable" and has received

a completed application for the policy as well as a first premium payment.

If the agent is in 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:

Limitations . the life insured must be insurable at the standard rate in

of TtAs order to validate the TIAo TlAs contain maximum coverages regardless of the

amount of insurance applied for

\-

Module 3: Underwriting qnd Clsims

LESSON 3: Underwriting

The completed application goes through the underwriting process when it has

been submitted by the agent before a policy can be issued.

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, it:s the task 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.

It's in the best interest

of the client, the

insurer, and you-the

agent-to ensure risk is

properly assessed.

3-9


How Premiums Are Calculated

Life insurance companies have two

investment earnings from the portfolio

income is used to pay all benefits due

operating expenses, and earn a profit for

sources of income: premiums and

of investments that they hold. This

to policyholders, pay the company's

any shareholders in the company.

The calculation of premiums is therefore very important. Done by actuaries, itis 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 mortalitytables are used for different groups of people since they represent differentlevels of risk for the insurer. For example, non-smokers will have a lowerpremium 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) allowsthe actuaries to estimate the amount of premium income the company willreceive from a number of policyholders over a specific period of time.

Separate morbidity tables are used for different groups of people since theyrepresent different levels of risk for the insurer. For example, men will have a

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

women.

The Sequence of Undelwriting

rates of mortality mortality tables premium rates

3-10


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

The Originof

Underwriting

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

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

Properly assessing risk

may mean some bad

news for the client. A

high degree of risk could

require higher premiums.

Unacceptable risk will

mean the policy is

denied.


Hazafds and Perils

Hazards contribute to perils. Ahazard can be physical or moral. Perils lead

to pure risk and pure risk leads to loss.

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. Thephysical hazard is the dog leash; the moral hazard is your habit

of leaving the dog leash lying on the step instead of winding itaround the stair handrail; the peril is your disability and the loss

is your dirninished income while you recuperate.

Ratings for Special Risks

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

greater risk to the insurer because they are more likely to make a claim. Amedical condition, medical history, occupation, or lifestyle can give rise to

higher mortality rates than those used to determine the insurance company's

PremiumTaxes

Every province levles premium taxes on the premium paid on all

types of insurance sold or premiums paid within the province. The

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 thoughpremiums 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 inwhich 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.

Physical Hazard

Moral Hazard

3-r2


standard premiums. If the insurer decides to accept the additional risk, a rated

contrqct will be offered with higher premiums than for those in a standard

policy.

Another possibility is for the life insurance company to offer a modified

contract that would exclude the additional risk (an exclusion rider). For lifeinsurance, the life insured who skydives may be offered the choice of an

additional premium or an exclusion that would not pay the death benefit if the

lit-e insured died in a skydiving accident. For disability income insurance, the

insured who has a history of lower back pain may be offered a policy thatu 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 tolast 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


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.

The Role of the Agent in UnderwritingThe role of the agent is very important throughout the whole of the underwritingprocess. 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/orlifestyle of the applicant that would alter the risk of his or her insurability fromthe time that the application is made until the policy is delivered. If a materialchange is evident, the policy should not be delivered and should be returned tothe company along with an explanation, including the reason for its return (such

as, "Since application was taken, the client has been seriously injured at workand 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 AccuracyThe agent must check to ensure that the particulars of the policy are correct. Thismeans 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

TheApplicantHas a Say

When the underwriters have reviewed the information from all

sources to assess the risk of the proposed life insured, they willeither recommend a standard or a rated policy be issued, orreject the application entirely. lf a rated policy that carries higherpremiums is prescribed, the company should confirm that theapplicant will accept a rated policy before it is issued. Thelnsurer will issue the policy with an amendmenf that the policyowner must sign before the policy can be placed in force.

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

:r{-r 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

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

can make an informed choice.

's;-<;-o fh€ Policy Receiptr. ;,,:nicv receipt is usually signed by the policy owner and witnessed by the

;u"r::.: u'hen the policy is delivered. The policy receipt should contain the

:'- -,;r number and the date of delivery. The latter is very important as itr : '- rdes proof of the date on which the 1O-day rescission period begins.

lssuing the policy

receipt is one of

your most important

duties as an agent!

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 squash-

playing 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: ReinsuranceInsurance 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

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 aretrocessionaire (a third insurer), or a number of different retrocessionaires in aprocess 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 orportion 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 rerimffiili Iftlilifr€,d the direct writer

E r oeding company)

rer nsu rer(also called the assuming company) retrocessionaire

increasing risk

There are three

parties in the

reinsurance process:

the insurer, reinsurer,

and retrocessionaire.

3-t7


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

whether the policy is:

/ v life insurance policy

/ a disability policy/ an accident and sickness policy

the insurer) differently according to

A life 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. Agroup 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.

DefiningIncomePaymenfs

lnsurance policies specify income payments to distinguish them

from lump-sum payments. An income payment is received as aregular series of payments - made weekly, ffionthly, quarterly or

annually - over a period of time (e.9. $2,000 per month over 24

months). A lump-sum payment is typically received as a death

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).

3-18

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 GlaimantLife benefi erary

Individual Disability policy owner

A&S policy owner

Group policy group policy owner or insured

The Glaims Examinerclaims examiners receive and review the information from the agent as well as

the claims statement to confirm that:

o the insurance contract was in force at time of the claim. if a life policy, the deceased was the life insured

o the loss is covered by the contract

r 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 supplyrFre 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 ofdeath 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) thatiLrnfirms 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

ll a policy olvner fails to

pay premiums or repay a

loan, his or her death

benefit can be reduced.


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.

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 DeathBenefit

Calculation

Face amount of the policy

PLUS + extras, as entitled

MINUS - policy loan and interest to date of deathMINUS - outstanding premiums

EQUALS = Net death benefit

A Case of Material MisrepresentationBob Pastel, agent for Sempra Fidelity lnsurance, has made an

appointment to assist his client, Albert Small, in completing theapplication for a $500,000 whole life policy. Prior to the meeting,Bob completes part of the application with details of Albert's fullname, address, occupation, and age. Bob records that Albert'sname is Albert Small when, in fact, it is Albert Small, Jr.

When they meet, Bob asks Albert whether he has soughtmedical attention within the last 3 years. Albert says that he

recently went to the doctor to be treated for the flu. While this istrue, what Albert does not tell Bob is that the doctor discoveredthat 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.

t

t_

3-20


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

on the basis of the two items of misinformation in theapplication?

The answer is probably no and yes. They are both

misstatements, but for a misstatement to be the ground to voida policy, it must be material to the risk. A statement is materialonly if the company would have rejected the application oraccepted it with a rated premium. Here, the absence of Jr. in thename is not material to the risk in the poli.y; based on thisstatement alone, coverage could not be denied. However,Albert's failure to disclose the medical diagnosis and treatmentwould be considered material to the risk, and the insurancecompany 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 benefi crary

renefit is not included

lnd can, therefore, save

other than the estate has real benefits. The death

in the deceased's estate when calculatrng probate fees

the estate thousands of dollars.

\\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.

3-27

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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

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

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

E As you will learn in module 8, the purpose of a disability claim is to

replace lost income.

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

for:

o the date on which the disability began

o the cause, nature, and treatment of the disability

o the identity of the claimant's physician

Possible disputes occur when the claim

policy owner is disabled, the definition

not been met.

The policy owner of an individual policy

disability when the policy is taken out:

o any occupation (any occ)

o regular occupation, of

. own occupation (own occ),

examiner finds that, even though the

of total disability in the contract has

chooses between three levels of total

Read it now, know it

later...more on

disability in module 8.

3-22

Module 3: Undenariting and Claims

Temporary disability will be paid as a monthly benefit after the waitingperiod. Permanent disability is usually paid out as a lump sum after a 12-

month 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 - the

length of time income will be provided by the policy, and any 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 benefitperiods both mean more expensive coverage.

The insured has 30 days from

asent in writing of the claim

provide proof of the claim.

The benefits from a disability

w ork or the coverage ceases in

the date a claim arises to notify the insurer

and 90 days from the date a claim arises

income policy end when the insured returns to

the contract, whichever comes first.

or

to

Group Policies: A group disability plan insures groups of people instead ofindividuals. 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 a group plan is in place, the policy owner is the employer. The employer

determines the amount of insurance that will be put in place and the conditions

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 will be required for:r the date on which the disability began

r the cause, nature, and treatment of the disabilityo the identity of the claimant's physician

3-23


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]lonly 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 disabilitypolicy in which the policy owner is not required to pay premiums on the policyif he or she is disabled according to the definition of disability in the rider orpolicy. The underwriting of this rider is separate from the underwriting on alife 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 ofits duration.

3-24


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

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

lump-sum payments as reimbursements for medical expenses incurred while

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

A claim form must be completed by the insured and either submitted directlyto 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 ClaimsIt is possible that the insurer will not make a payment to the claimant for one

r-rf the following reasons:

o the policy may have lapsed for non-payment of premiums

r the policy may have been surrendered by the policy owner for its cash

surrender value (CSV)

o the policy may have expired by its own terms

o there has been material misrepresentation by the applicant or lifeinsured within the first two years of the policy

. fraud

o the claim may not satisfy the definition of disability in the policyo 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)

You'll learn more details

about A&S in modules Iand 9.

3-2s


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,

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

policies.

Sources of government benefits include:o Canada Pension Plan (CPP)

o Veterans Affairso 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 DutyArea may be eligible for disability pension benefits, loss of earnings benefits,

income support, or supplemental retirement benefits through programs offered

by Veterans Affairs.

Employment Insurance (EI) provides benefits for sickness and maternity and

parental leave.

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 whilenot "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 have contributed to the plan

e 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.

lndividual

insurance

policies can

"top up"

government

plans.

3-26

\Module 3: Underwriting and Claims

Module 3: Summary of Key Points

There are three parties involved in undenruriting andclaims: the applicant/insured; the agent; the insurer.

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

Average risk = standard premiums.Higher risk = higher premiums or policy with exclusions.Unacceptable risk = denied policy.

Medical information about the applicant is key to riskassessment. The MIB is a medical information databasethat undenrvriters access to help determine risk of anapplicant.

lnsurers share risk with other insurers in the process calledreinsurance.

The agent must personally deliver the policy and make anon-the-spot judgment about whether the risk representedby the applicant is the same as when the application wascompleted.

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 dieswith a (net) death benefit payment to the benefici ary.

ln order for a disability claim to be made, the insured mustmeet the definition for total disability that he or she hasselected in the policy. any occ, regular occ, or own occ.

lndividual disability policy claims are settled (that is, thedefinition has been satisfied) with a regular incomepayment to the insured.

A&S claims are settled with a payment that is a

reimbursement of qualifying medical claims.

Take time to memorize all these key

points; you may find some of them

on the exam.

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module2-3

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