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Insurance FAQs
What is Risk Management and How Does it Apply To Insurance?
At the core of all insurance is "risk management". That could involve managing risks affecting property as a result of fire, theft, or some other natural disaster. For example, it could involve managing the risk of death, disability, or the risk that some of us toward the very end of life will begin to lose the ability to care for ourselves and will need help with the most basic facets of life.
Life insurance involves a "pooling of risk" among persons to redistribute and spread the risk so that each will pay "a little" to avoid anyone being harmed by a "large" loss when someone dies. Life insurance has been around for centuries and over the years, mortality tables have been developed that make the number of deaths within any given risk classification pool (i.e. for a given age, smoking status, overall health, and family history, etc.) very predictable. These mortality probability statistics are combined with compound interest tables since most persons will live a long time, and their payments into the policy can be invested at interest. Life insurance companies use these mortality statistics and interest calculations to develop premiums which can cover the risk as well as whatever other expenses may be involved in underwriting and issuing the policy; compensating any agent involved, and administering the policy over the years.
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What is Risk Assessment or Underwriting?
Risk Assessment or Underwriting is the process of figuring out how much risk someone or something presents to the whole group. Individual risk selection then determines how much each person should pay relative to his/her particular set of risk factors. A 50 year old male who is 40 or 50 pounds overweight; smokes 3 packs of cigarettes a day; whose father died of a heart attack at 50 and whose mother died of cancer at 30, should obviously pay substantially more than the same age male who has never smoked; who exercises regularly and is normal build, and whose parents are both still alive in their 80's. Most insurance companies use similar underwriting risk criteria.
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Why is Life Insurance Different from Property & Casualty
Insurance with Respect to Misrepresentations and Omissions?
With property and casualty insurance, ordinarily a person who misrepresented information would still be around to deny or defend his or her answers to questions that were asked during the application process if a fire or an accident occurred. Such is not the case with life insurance. Since the insured definitely will not be around to defend his or her answers to questions on an application or other information that was not even asked, but which might have had a bearing on accepting or rejecting the risk, life insurance is unique.
First, statements made on a life insurance application become part of the insurance contract. The answers to the questions are treated as "representations". That is, I represent something to be true; I'm stating that to the best of my knowledge, it's true. regardless of what may actually be true in fact.
For example, say that a person had answered a question on a life insurance application stating that he had never been treated for or diagnosed with cancer, and yet 6 months later, died of lung cancer and even though it was determined that the tumor had started growing well before he had applied for insurance, the company would still have to pay the claim.
On the other hand, had this person gone to a doctor and been advised that there was something suspicious showing on an Xray, and then had gone out and applied for life insurance. . .then died 6 months later, it would be a different story. And had this person "omitted" the name of the doctor, or the fact that he had gone to see this doctor, this omission would probably cause the claim to be denied.
Secondly, with life insurance, after a policy has been in force for two (sometimes three) years, in the absence of fraud, the policy become incontestable. And the burden of proof is on the insurance company that there was fraudulent intent involved. This provides further protection to the insured's beneficiaries especially since life insurance policies may stay in force for many years and it would be almost impossible to trace back the exact facts at the time of application.
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How Does MIB Fit Into this Picture Concerning Misrepresentation and Fraud Prevention?
Assume that a man was told by his physician that he had a suspicious spot on his chest X-ray. He then went out and applied for life insurance and correctly listed this doctor's name, the date he had seen him, and the fact that a suspicious growth had been noted. Later when the insurance company ordered the medical records and saw that there was some question as to the diagnosis of this "spot", the company would probably either "postpone" issuing the coverage until a definitive diagnosis could be made or decline the coverage.
Also, assuming the company was a member company of MIB, the underwriter would enter an appropriate code that would serve as a "red flag" to another underwriter that this condition was unresolved.
If this man applied to another insurance company but omitted this doctor's name, or even the fact that he had been to see him, the new company (as a member of MIB) would run an MIB check and this code would alert the underwriter to the medical condition.
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Why Should MIB's Role in Preventing Fraud be of Interest to Me?
If you buy insurance from a company that suffers a disproportionate share of claims against it, the excess mortality experience can have an effect on the performance of your individual policy. Poor mortality experience, as a result of persons withholding or omitting information or by misrepresentations made that would have either caused the company to decline to issue or charge an extra premium for the extra risk, affects all the insureds of that company indirectly. The company may need to raise rates, reduce dividends or interest credited to policies, or make other adjustments to compensate for poorer than expected mortality experience. By alerting its member companies to possible attempts at omission, misrepresentation, or fraud, MIB is helping to reduce the incidence of these cases and is indirectly helping hold down premiums.
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