Who signs an insurance application?

In this section we elaborate on the following:

• The preliminary steps of entering into an insurance contract
• The roles assumed by applications and binders in the offer and acceptance process

Although more insurance is sold rather than bought, the insured is still required to make an applicationAn offer to buy insurance, which is an offer to buy insurance. The function of the agent is to induce a potential insured to make an offer. As a practical matter, the agent also fills out the application and then asks for a signature after careful study of the application. The application identifies the insured in more or less detail, depending on the type of insurance. It also provides information about the exposure involved.

For example, in an application for an automobile policy, you would identify yourself; describe the automobile to be insured; and indicate the use of the automobile, where it will be garaged, who will drive it, and other facts that help the insurer assess the degree of risk you represent as a policyholder. Some applications for automobile insurance also require considerable information about your driving and claim experience, as well as information about others who may use the car. In many cases, such as life insurance, the written application becomes part of the policy. Occasionally, before an oral or written property/casualty application is processed into a policy, a temporary contract, or binder, may be issued.

As discussed in Chapter 9 "Fundamental Doctrines Affecting Insurance Contracts", property/casualty insurance coverage may be provided while the application is being processed. This is done through the use of a binder, which is a temporary contract to provide coverage until the policy is issued by the agent or the company.

In property/casualty insurance, an agent who has binding authority can create a contract between the insurance company and the insured. Two factors influence the granting of such authority. First, some companies prefer to have underwriting decisions made by specialists in the underwriting department, so they do not grant binding authority to the agent. Second, some policies are cancelable; others are not. The underwriting errors of an agent with binding authority may be corrected by cancellation if the policy is cancelable. Even with cancelable policies, the insurer is responsible under a binder for losses that occur prior to cancellation. If it is not cancelable, the insurer is obligated for the term of the contract.

The binder may be written or oral. For example, if you telephone an agent and ask to have your house insured, the agent will ask for the necessary information, give a brief statement about the contract—the coverage and the premium cost—and then probably say, “You are covered.” At this point, you have made an oral application and the agent has accepted your offer by creating an oral binder. The agent may mail or e-mail a written binder to you to serve as evidence of the contract until the policy is received. The written binder shows who is insured, for what perils, the amount of the insurance, and the company with which coverage is placed.

In most states, an oral binder is as legal as a written one, but in case of a dispute it may be difficult to prove its terms. Suppose your house burns after the oral binder has been made but before the policy has been issued, and the agent denies the existence of the contract. How can you prove there was a contract? Or suppose the agent orally binds the coverage, a fire occurs, and the agent dies before the policy is issued. Unless there is evidence in writing, how can you prove the existence of a contract? Suppose the agent does not die and does not deny the existence of the contract, but has no evidence in writing. If the agent represents only one company, he or she may assert that the company was bound and the insured can collect for the loss. But what if the agent represents more than one company? Which one is bound? Typically, the courts will seek a method to allocate liability according to the agent’s common method of distributing business. Or if that is not determinable, relevant losses might be apportioned among the companies equally. Most agents, however, keep records of their communication with insureds, including who is to provide coverage.

Conditional and binding receipts in life insurance are somewhat similar to the binders in property/casualty insurance but contain important differences. If you pay the first premium for a life insurance policy at the time you sign the application, the agent typically will give you either a conditional receipt or a binding receipt. The conditional receiptPolicy that does not bind the coverage of life insurance at the time it is issued, but it does put the coverage into effect retroactive to the time of application if one meets all the requirements for insurability as of the date of the application. does not bind the coverage of life insurance at the time it is issued, but it does put the coverage into effect retroactive to the time of application if one meets all the requirements for insurability as of the date of the application. A claim for benefits because of death prior to issuance of the policy generally will be honored, but only if you were insurable when you applied. Some conditional receipts, however, require the insured to be in good health when the policy is delivered.

In contrast, a claim for the death benefit under a binding receiptPolicy that will be paid if death occurs while one’s application for life insurance is being processed, even if the deceased is found not to be insurable. will be paid if death occurs while one’s application for life insurance is being processed even if the deceased is found not to be insurable. Thus, the binding receipt provides interim coverage while your application is being processed, whether or not you are insurable. This circumstance parallels the protection provided by a binder in property/casualty insurance.

In this section you studied that the act of entering into an insurance contract, like all contracts, requires offer and acceptance between two parties:

• The insurance application serves as the insured’s offer to buy insurance.
• An agent may accept an application through oral or written binder in property/casualty insurance and through conditional receipt or a binding receipt in life/health insurance

Discussion Questions

1. What is the difference between a conditional receipt and a binding receipt?
2. You apply for homeowners insurance and are issued a written binder. Before your application has been finalized, your house burns down in an accidental fire. Are you covered for this loss? What about in the case of an oral binder?
3. Dave was just at his insurance agent’s office applying for health insurance. On his way home from the agent’s office, Dave had a serious accident that kept him hospitalized for two weeks. Would the health insurance policy Dave just applied for provide coverage for this hospital expense?

If you’ve been shopping for life insurance and have chosen your policy type, amount and company, you’re ready for the life insurance application. It’s a long process with many important, detailed questions, but you can set yourself up for success by preparing information ahead of time.

To help everything go smoothly, here’s what you’ll want to know before you put pen to paper.

Your life insurance company wants to know how likely you are to die while you’re covered. To figure out that risk, it asks you a series of questions about your family’s health, your health and the activities you engage in.

The less healthy you are, the more the company is going to charge you for coverage. That can lead some applicants to stretch the truth on their life insurance applications, which ends up being a horrible idea.

Lying on your life insurance application can lead to a denial of your application or a denial of benefits later on. Policies typically start with a life insurance “contestability period,” which is a two-year span when, if you die, the insurance company can dive into the details of your application and see if you omitted anything or lied. If you did, the insurer will likely deny your claim.

» MORE: Life insurance definition

Since certain diseases among family members can affect your life expectancy, the life insurance company will want to know whether your parents or siblings have been diagnosed with or treated for heart or kidney disease, stroke, diabetes, cancer or other conditions.

If they have, know their age at the onset of the condition and, if they are deceased, their age at death. Insurers are mainly looking for earlier onset diseases, so if your parents died at an older age, you won’t be penalized. For instance, an insurer may ask if your family members had heart disease or cancer before age 60 or 65, depending on the company.

Although you provided information about your health to get a quote, you’ll need to provide it again for your life insurance application. There’s no point in fudging here because your insurer will use your medical records and information from a company called MIB Group (formerly the Medical Information Bureau) to verify everything.

Life insurance companies use MIB because it collects health information from many providers all in one place. That information can help an insurance company determine how risky you are to insure.

MIB maintains a database of health conditions applicants have reported on applications made in the last seven years for individual life, health, long-term care and other insurance types. If you previously applied for a life insurance policy and stated that you had been treated for cancer and your new application doesn’t mention the cancer treatment, this will raise a red flag from MIB, and your life insurer will likely want to investigate further.

Have the name, address and phone number of your primary physician and the physician you last saw, along with the date of your last visit.

Be prepared to report the date, symptoms, diagnosis and treatment for a wide variety of medical conditions. The list will be very long and includes:

• Cancer, tumor and melanoma.

• Brain disorders (even chronic headaches).

• Depression, anxiety and suicidal thoughts.

• Obsessive-compulsive disorder.

• Problems with eyes, ears, nose or throat.

» MORE: How to get life insurance if you have a pre-existing condition

The life insurance application will ask about past use of illegal drugs, current alcohol consumption and prescription medications, and whether you’ve ever been advised to seek addiction treatment.

The life insurance company will typically ask if you have any criminal convictions or a history of a suspended driver’s license, moving violations or DUI. If you do, know the dates — insurers are generally only interested in events for a certain time period, such as the last five years.

Piloting a plane, rock climbing, ice climbing, hang gliding, scuba diving, skydiving and car racing can all increase your chance of death, so the life insurance application will ask if you have participated or intend to participate in those. Risky hobbies will boost your life insurance premiums or may result in a denial.

The application may also ask if you intend to travel outside the United States in the next year or two.

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Your life insurance company also needs to know a bunch of practical and logistical information when you apply for a policy. These questions don’t address the risk you present to a company, but without the answers, your life insurance wouldn’t work.

When you buy a policy, you’ll designate your life insurance beneficiaries on the application. Beneficiaries are the people who receive any benefits from the insurance policy if you die while it’s in force. You can assign different percentages of the benefit to each of your beneficiaries. For instance, you could assign 70% to your spouse and 30% to your brother.

You should also be prepared to designate a secondary beneficiary. This is the person who receives the benefit if the primary beneficiary dies before you do.

Be sure you have your beneficiaries' Social Security numbers and dates of birth.

The application will likely ask how often you want to be billed. Common choices are single payment (meaning one large lump sum), annually, semi-annually, quarterly and monthly.

The life insurance company will want to know if you have other life insurance applications pending, and for how much insurance. If you seem to be applying for more life insurance than your situation calls for, the company will likely ask why.

The application will also ask how much individual life insurance you already have in place.

» MORE: Compare life insurance quotes

Why does signing your name deserve special attention? Because the life insurance application is a legal document. It can be used against you if you have intentionally misreported anything, which the insurer would consider fraud.

The insurance company is going to verify everything to the extent possible, which could include pulling your:

• Prescription drug record.

• Credit history (to look for bankruptcy).

No matter what type of insurance you purchase, you’ll need to follow all of the steps listed above. However, there are some differences in the application processes for term life insurance and permanent life insurance, such as whole life.

Because term life insurance has no cash account (the part of a permanent policy that gains value over time), you won’t need to answer any financial questions beyond who gets the benefit of your policy when you die.

Permanent policies are more complex financial tools. They change in value over time, either at a fixed rate or through investments that can rise or fall. As a result, when you’re applying for a permanent life insurance policy, you’ll need to answer some additional financial questions.

Depending on the product you’re applying for, you’ll need to choose ways to take loans from your cash account, decide whether to have your death benefit include the cash account, choose how to divide premium payments among investment accounts or certify that your seller presented a prospectus. There may be additional questions regarding your financial fitness, as well.

You’ll be contacted by a paramedical examiner to schedule an exam if your policy application requires one. You’ll arrange for a convenient time and place for the exam — for example, at home in the morning.

The exam generally includes height, weight, urine and blood samples and a review of all the medical questions again. You’ll be an expert on your own medical history when this is over.

Not all life insurance requires a medical exam. Simplified issue and guaranteed issue life insurance both attempt to skip the exam by using more health data or by charging higher premiums for coverage than traditional life insurers.

How long it takes to issue your policy will depend on how quickly the insurer can get your medical records and verify your application information. If the insurer has any follow-up questions, that will extend the process. According to Life Happens, an educational nonprofit supported by insurers and brokers, the review of your application typically takes a few weeks.