Health Basics. 8.1 General Definitions LEARNING OBJECTIVES OVERVIEW

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1 8 Health Basics LEARNING OBJECTIVES Upon the completion of this chapter, you will be able to: 1. Identify the definitions of accident, sickness, peril, and pre-existing conditions 2. Understand the principal types of losses and benefits covered by Accident and Health policies 3. Classify the different underwriting actions that may be taken by an underwriter 4. Identify 4 sources of underwriting information 5. Explain the consequences of replacing a health insurance policy OVERVIEW The purpose of this chapter is to acquaint the student with the types of perils, losses, and benefits involved in health insurance. This chapter will also review the process of completing an application, underwriting, and delivering a health insurance policy. Health insurance, which may be referred to as Accident and Health or Accident and Sickness Insurance, is purchased by the owner of the policy. The owner controls the policy, is responsible for the premium payments, and maintains all rights within the policy. The owner may also be the insured. 8.1 General Definitions Term Accident & Health Insurance Accidental Injury Accident (Injury) Coinsurance Copayment Deductible Morbidity Table Pre-existing Conditions Definition Policy covering the perils of injury and sickness A spontaneous event, unforeseen and unintended, resulting in injury One of the following may be used: Accidental Results Requires only that the injury be unintended and unforeseen Accidental Means Requires both the injury and the cause of the injury to be unintended and unforeseen; considered more restrictive. This definition is not allowed in some states. The cost sharing between the insurer and the insured stated as a percentage of the claim amount, payable after the deductible has been met A stated dollar amount that applies per claim in addition to any other cost-sharing The initial amount payable by the insured before insurance benefits apply Table showing the mathematical probability of a loss due to a sickness or injury. This table is used to help determine premiums for accident and health insurance. The morbidity table is comparable to the mortality table used for life insurance rating. Prior medical conditions for which the applicant has received, or should have received, medical advice or treatment within a specified period before the effective date of a policy 104

2 HEALTH BASICS Term Probationary Period Sickness Subrogation Definition Specified period of time after the effective date and before new coverage goes into effect for specified conditions, such as losses due to a sickness or pre-existing conditions An illness or disease that is contracted after the probationary period has ended, at least 30 days Transfers an insured s legal right of recovery to the insurer that has paid a claim. This prevents the insured from collecting twice for the same loss and holds the responsible 3rd party accountable for the loss 8.2 Principal Types of Losses and Benefits Disability Income (Loss of Time or Income) Contract that pays weekly or monthly benefits due to injury or sickness if an insured is unable to perform the duties of their job. The benefit is either a percentage of the insured s past earnings or a flat dollar amount. Medical Expense Contract that covers the various expenses which an insured may incur due to an accident or sickness. Dental Expense A form of Medical Expense health insurance covering the treatment and care of dental disease and injury affecting the insured s teeth. Long-Term Care Expense Product designed to provide coverage for personal care services in a setting other than an acute care unit of a hospital, such as a nursing home or even one s own home. Accidental Death and Dismemberment Pays the principal sum (face amount) upon accidental death, loss of sight, or loss of 2 limbs. It pays the capital sum per policy schedule (up to 50% of the face amount) for the loss of vision in 1 eye or loss of 1 limb. It may be a stand-alone policy or added as a rider to a Disability Income, Medical Expense or a Life Insurance Policy. Home Health Care Benefits for limited nursing services, home health aide, light housekeeping, and related expenses may be available in both medical expense insurance and long-term care insurance. Retention Question 1 A disability income policy may provide a benefit for loss of time from employment in which of these ways? a. A daily amount for each day hospitalized and a lesser amount for each day at home b. A flat benefit only c. A flat benefit amount or a percentage of pre-tax income d. A percentage of pre-tax income only Retention Question 2 In an AD&D policy, the capital sum provides benefits for which of the following losses? a. Death from all causes b. Loss of limbs or eyesight from disease such as diabetes c. Death from accidental causes d. Loss of limb or eyesight from accidental causes 105

3 CHAPTER EIGHT 8.3 Classes of Health Policies Individual vs. Group Individual health insurance (including coverage for a family) is purchased by an individual and is not dependent upon an employer. Some individual health plans require proof of insurability; and rates apply based on underwriting factors used by the insurance company. Individual plans tend to be more costly than group plans and have higher deductibles and out-of-pocket expenses. Group insurance plans (employer sponsored) are available to employees and dependents. Group underwriting factors determine the premiums for the group, as opposed to underwriting each individual. The employer makes all decisions regarding the coverage under a group plan, but mandatory benefits must be offered. Proof of insurability is not typically required for an employee to obtain coverage under a group health plan. A federally regulated ERISA-covered group health plan is an employment-based plan that provides coverage for medical care, including hospitalization, sickness, prescription drugs, vision, or dental. These plans can provide benefits by using funds in a plan trust, the purchase of insurance, or by self-funding benefits from the employer s general assets. Private vs. Government Most insurance is written through private insurers. Private insurers are commercial companies, such as stock and mutual insurers that sell to the general public. Insurance may also be offered through the government. Health insurance plans provided by the government include Social Security Disability, Medicare, Medicaid, and TRICARE for military personnel. Limited vs. Comprehensive Some health plans are designed to cover limited benefits, based on the type of loss as stated in the policy or a limited dollar amount. Comprehensive plans cover a broader range of losses and have larger policy limits. Retention Question 3 Employment-based plans are governed under which of the following federal acts? a. FICA b. ERISA c. COBRA d. FCRA Retention Question 4 Which of the following is not a government-sponsored plan of health care? a. Medicare b. Medicaid c. Medicare Supplement d. Social Security disability insurance 106

4 8.4 Producer Responsibilities in Individual Health Insurance HEALTH BASICS Solicitation and Marketing Requirements Advertising The purpose of an advertising regulation is to give a complete and accurate description to the public, prevent unfair competition, and set a minimum standard of conduct. In most states, each insurer must provide the Department of Insurance a copy of any advertisement prior to its use. Each insurer must maintain at its home or principal office, a complete file containing every printed, published or prepared advertisement of its individual, blanket, franchise and group policies. Advertisements are printed or published material, audiovisual material and descriptive literature, to include newspapers, magazines, radio scripts, television scripts, billboards, sales talks, presentations, and personal testimonials. Additional requirements: Insurance companies are responsible for the accuracy of its personal testimonials. Insurers may include statistical information as long as it is accurate and the source is named. The agent must include the full name of the insurer when advertising a certain type of policy. When an agent misleads the public in an advertisement, both the insurer and agent are held accountable. When insurers advertise that a group endorses a certain health product, the public must be made aware of any control the insurer may have over the group. When insurers advertise by comparison of like products, the comparisons must be complete to include rates, policies, benefits, and dividends. The history of a very high or unique claim settlement cannot be used in advertising by the agent or insurance company. Prohibited Forms of Advertising No advertisement of a hospital or facility confinement benefit shall advertise that the amount of the benefit is payable on a weekly or monthly basis when, in fact, the amount of the benefit is based on a daily pro rata basis related to the total amount of days of confinement. An advertisement cannot use the words: only, just, merely, minimum, or similar words to imply a minimal imposition of restrictions and reductions. An advertisement cannot imply that claim settlements are generous or liberal or use similar words to imply the same thing. Any advertisement that uses a policy title to misrepresent or that might misrepresent coverage is unlawful. Do Not Call Registry The Federal Trade Commission amended the Telephone Consumer Protection Act (TCPA) to give consumers a choice about receiving unwanted telemarketing calls. It is illegal for most telemarketers or sellers to call a number listed on the National Do Not Call Registry. Companies must update their list at least once every 31 days. The TCPA also limits the hours that telemarketers may call noncustomers at home to between the hours of 8 am - 9 pm. 107

5 CHAPTER EIGHT Sales Presentation Agents are required to provide prospective health insurance buyers with all sales materials used when soliciting policies of insurance. Outline of Coverage An outline of coverage (also called a policy summary) must be provided to a prospective buyer of health insurance at the time of application or policy delivery. The outline of coverage includes benefits, premiums, and other relevant information regarding the sale of the policy. Errors and Omissions Errors and Omissions is professional liability insurance covering the liability of an agent. Claims are filed due to client reports (complaints) for a number of reasons. The two most common examples of complaints are: Inadequacy, failing to obtain proper type or amount of coverage for a client. Negligence, quoting inflated information or misrepresenting a plan of coverage neglecting the effect the information might have on the client at a later date. The producer may be guilty of negligence whether the mistakes are intentional or unintentional. Retention Question 5 Certain disability and health care insurance products may be subject to specific advertising regulations. In general, insurance producers should do which of these? a. Create and use their own product-specific advertising b. Avoid all advertising since it is costly and does not often produce consistent results c. Duplicate ads of other agents seen in newspapers or magazines, changing only the name, address and phone number for their agency d. Use company-provided advertisements for each product they wish to market Retention Question 6 Before telephoning a prospect for the first time, a producer must do which of the following? a. Check the company and national do not call lists to be sure the phone number is not restricted b. Make sure he/she has memorized the company-approved telephone solicitation script c. Send a letter to the prospect advising him/her that a follow-up phone call will be coming d. Obtain certification under the TCPA to be able to call any phone number in America 8.5 Individual Health Insurance Underwriting The policyowner is the person applying for insurance coverage and is responsible for completing an application. The owner may or may not be the insured, or the person being covered for a loss under the policy. Typically, benefits are payable to the insured in a health insurance contract. The policyowner may select a beneficiary who will receive benefits under the contract if a loss occurs. If the policy provides a death benefit and the insured dies before the benefits are paid out, the named beneficiary will receive payment from the claim. The primary beneficiary is the first in line to receive a benefit. A contingent (secondary) beneficiary may also be named in case the primary beneficiary dies before the insured. Both the owner, or applicant, and the insured must be present and sign the application. 108

6 HEALTH BASICS Field Underwriting Nature and Purpose Field underwriting is very important due to the risk of a moral hazard. It is the initial step of the total process of insuring a health risk. It includes the producer s initial personal contact with the applicant and the determination of insurability while assisting the applicant in recording information on the application. Fundamentally, the purpose is to be certain that a prospective insured individual or group has the same probability of loss for which the premium rate is based. Completing the Application and Field Underwriting An application is a written formal request by an applicant to an insurer requesting the insurer issue a policy based upon information contained in the application. It is the producer s responsibility to probe beyond the stated questions, which is known as field underwriting. The application is the primary source of information for an insurer underwriting a potential risk. If attached to the policy, a copy of the application becomes part of the entire contract. Required Signatures Both the producer and the applicant must sign the application. The applicant is representing that statements on the application are true. If someone other than the insured is the owner, both signatures are required. If the applicant is a minor, a guardian must sign the application. Changes in the Application If an answer to a question on the application needs to be changed, the producer or applicant may make the correction but the applicant must initial the change, or the producer can complete a new application. Consequences of Incomplete Applications It is the producer s responsibility to make certain the application is filled out completely, correctly, and to the best of the applicant s knowledge. The underwriter will most likely return an incomplete application to the producer for completion by the applicant. If a policy is issued based on an incomplete application, it is assumed the information is not material to the issuance and the insurer waives the right to challenge a claim based on the incomplete application. Collecting the Initial Premium and Issuing the Receipt If a premium is paid at the time of application, the producer will provide the owner with a conditional receipt. The conditional receipt provides coverage effective back to the date of application as long as coverage is issued as applied, standard or better. If a loss occurs before the policy is issued, the insurer would have to prove the policy would not have been issued as applied; otherwise, the loss is covered based on the terms of the receipt. If a producer does not collect the initial premium and submits ONLY the application to the insurer, the policy will not go into effect until the application has been approved, the policy has been issued, and the premium has been paid. Disclosures and Consent Notice of Information Practices and Disclosure Fair Credit Reporting Act (FCRA) The insurance company must meet requirements under the FCRA when gathering information from a third party to use during underwriting. The applicant must be notified and give consent for information to be received by a third party. This information is disclosed as part of the 109

7 CHAPTER EIGHT application. The signature on the application by the applicant serves as the notice of information practices. This gives the insurance company the right to obtain the various investigative, medical, and financial reports to compete the underwriting process. HIPAA Disclosures and Consent Health care providers are required to preserve patient confidentiality and protect health and medical information. All medical information obtained on an applicant during the underwriting process must remain confidential and the applicant s privacy must be protected. Before an insurer can share any medical information, the applicant must be notified of the treatment of the information, rights to maintain privacy, and an opportunity to refuse the dissemination of information. Insurers are required to maintain strict confidentiality of personal information obtained through testing and must have written consent of the applicant before testing for HIV. The HIV Consent Form explains the purpose of the test, confidentiality, and specifies how individuals may receive the test results. Insurance companies may refuse to issue a policy to individuals based on positive HIV test results. Underwriting Factors Underwriting involves analysis of the applicant to determine if he/she is acceptable for the proposed insurance. It also attempts to eliminate conditions with more frequent and higher claims than the insurer s rates anticipate. Individual underwriting factors may include: Age Gender Tobacco use Occupation and hobbies (degree of risk); if more than 1 occupation, the most hazardous will be used Physical condition Moral hazard/financial hazard Health history Foreign travel/residence Other insurance Plan applied for Retention Question 7 Answers to questions in applications for health and disability insurance are considered representations and not warranties. If an applicant later realizes he/she answered a question incorrectly, how may the answer be changed? a. Once submitted, answers in an application for insurance cannot be changed b. The applicant will have the opportunity to correct any wrong answers when the policy is delivered c. The applicant will have up to two years to correct any wrong information in the application d. Wrong information may be corrected at any time prior to issuance of the policy 110

8 HEALTH BASICS Retention Question 8 All of the following are individual underwriting factors, EXCEPT: a. Age b. Gender c. Marital status d. Tobacco use Retention Question 9 Which one of the following is the initial source of underwriting information? a. The medical exam b. The attending physician statement c. The application d. The investigative consumer report Information Sources and Regulation of Underwriting Application Part I - General: Contains general questions about the applicant, such as gender, marital status, residence, date of birth, occupation, and past and present life insurance. Part II - Medical: Contains questions pertaining to medical background, past and present health, any medical visits, hospitalizations, or surgeries in recent years, and medical status of immediate family members, including their ages and causes of death. Medical Examination Records of an examination conducted by a medical professional regarding the applicant s present health. This is usually requested by the insurer after determining if the amount of coverage, age of applicant or health history warrant the examination. Medical exams are performed at the insurer s expense. Attending Physician Statement (APS) Used in cases in which the individual application and/or medical reports reveal conditions of which more information is required. This statement is completed by the applicant s personal physician treating a specific condition. An applicant must sign a written release to enable a release of the APS. Medical Information Bureau (MIB) The primary purpose is to collect adverse medical information about an applicant s health (supported by insurance companies) and act as an information exchange. MIB is a memberowned corporation that operates on a not-for-profit basis. The MIB s underwriting services are used exclusively by MIB member life and health insurance companies to assess an individual s risk and eligibility during the underwriting of life, health, disability income, critical illness, and long-term care insurance policies. These services alert underwriters to fraud, errors, omissions or misrepresentations made on insurance applications and the MIB may help lower the cost of life and health insurance for consumers. The MIB s coded reports represent general medical information and other conditions (typically hazardous hobbies and adverse driving records) affecting the insurability of the applicant. If the coded reports are inconsistent with the information provided by the applicant, underwriters are required to conduct a further investigation to obtain more information about the reported 111

9 CHAPTER EIGHT medical histories or conditions prior to making an underwriting decision. Because the MIB information is general, the report cannot solely be used to decline an applicant for insurance. Inspection Report A general report of the applicant s finances, character, morals, work, hobbies, and other habits. This is sometimes referred to as a Consumer Investigative Report. This can be completed by the insurer or a third-party provider. The applicant must be made aware of any information gathering and has rights provided under the FCRA. Agent s Report A personal statement submitted by the producer to the insurer regarding any personal knowledge of the applicant, including information observed during the application process. This information remains confidential between the producer and the insurer, and it does not become part of the entire contract. Individual Selection Criteria The insurer uses all of the information collected by the field underwriter and other sources, to determine the acceptability of an individual. It is ultimately the home office underwriter s responsibility to determine if this individual meets all the underwriting requirements set forth by the insurer. Example The insurer receives a prepaid application. Upon the receipt of the MIB report, health problems are revealed. The underwriter will at this time, require additional information in the form of an Attending Physician Statement (APS) and/or possibly a medical examination. The underwriter may rate or deny the application based on this additional information. The MIB report reveals past medical concerns and cannot be used as the only medical report for rating or denying an application. Nonmedical Application A policy requested when the applicant s age, medical history or amount of coverage does not require a medical examination for underwriting. Health questions on the application are asked by the producer and are the only medical information required. Classification of Risks Premium Determination and Rating Health insurance requires underwriting similar to life insurance, but the risk to the insurance company is different. Underwriters are concerned about the possibility of illness or injury rather than death. Upon receipt of the necessary information, the home office underwriters analyze the information and determine if the applicant is an acceptable risk, looking at accident and illness history, exposure to environmental hazards, and working conditions. If acceptable, underwriters determine the classification to be used in the calculation of the premium. Assumptions and Calculations of Premiums Premiums are always paid in advance, are invested and earn interest for the insurer. Factors in Premium Determination Morbidity The predicted number of medical claims in any given year for a specific group of insureds. Morbidity Tables are used to provide statistics that give the company a basic estimate of how much money it will need to pay for medical and disability claims each year. 112

10 HEALTH BASICS Interest The second factor used in calculating the premium is interest earnings. Companies invest premiums in bonds, stocks, mortgages, real estate, etc., and assume it will earn a certain rate of interest on these invested funds. Expenses The amount charged to cover each policy s share of expenses of operation (salaries, commission, and cost of doing business) is called expense loading. This can vary from company to company based on its operations and efficiency. Morbidity - Interest = (Net Premium) + Expenses = Gross Premium Modes of premium payment refer to the frequency in which a premium may be made. Premiums can be paid monthly, quarterly, semi-annually, and annually. The more frequently the premium is paid, the higher the premium due to the company s administration costs and loss of investment income. Underwriting Actions and Classification Upon completion of the underwriting process, the insurer s underwriter will take one of the following actions: Issued as a Preferred Risk A lower rate will be used if the insured meets the insurance company s qualifications as a preferred risk (is lower than average risk). Issued as a Standard Risk The coverage requested at the rate that was quoted. Some health insurance may only be issued with standard rates. Premium rate-up would still be permitted for tobacco users. Issued as a Substandard Risk: Issued Rated-up Issue the coverage requested but at a higher rate. Higher premiums are required due to the greater potential for a larger number of claims (this may be referred to as a surcharge). Issued with Exclusions/Limitations May be temporary or permanent; limits the insurer s obligation to pay. The rider used to exclude coverage for existing conditions is sometimes referred to as an Impairment Rider. Rejection The policy is not issued and will be declined since the applicant is considered an excessive risk. Delivering the Policy Conditional Approval The premium paid by the applicant is the Offer and the policy issued by the insurer is the Acceptance. The insurer will send the policy to the producer for delivery, but coverage is in effect as of the date of application if it is accompanied by premium, or the date of a completed medical exam, if required. When the insurer determines that a particular applicant is an acceptable risk and has paid the premium, the insurer will issue the policy for legal delivery. It is a best practice for the insurer to send the policy to the producer for delivery to the insured. It is the producer s responsibility to deliver the policy and explain it to be sure the insured understands the benefits, policy provisions, riders, exclusions, and ratings endorsements. If no initial premium is paid, the application is considered a trial application. The Policy then becomes the Offer and upon delivery the premium is the Acceptance. In this case, the insurer will send the policy to the producer for a formal delivery. There is no coverage until a Statement of Good Health and premium are collected at the time of delivery. The Statement of Good Health is a signed statement by the applicant confirming that everything stated on the application is still true. If the applicant s health has changed since application, the policy will be returned to the insurer for possible further underwriting. 113

11 CHAPTER EIGHT Retention Question 10 Who pays for any reports or Medical Exams required as part of the underwriting process for insurance? a. The producer b. The insurance company c. The insured d. The policyowner Retention Question 11 All of the following are alternatives an insurer may have when asked to insure a substandard risk, EXCEPT: a. Charge a higher than standard premium b. Attach a rider to the policy excluding certain coverages or conditions c. Limit the coverages of the policy d. Issue the policy with a waiting period after which the insurer may cancel the policy 8.6 Replacement Considerations Replacement If replacing an individual health or disability policy, care must be taken to compare limits of coverage, benefits, and exclusions. The process of replacement includes canceling an old policy upon the purchase of a new policy. The old policy should not be canceled before the new policy is issued, otherwise this could leave the applicant without coverage. The new policy may require underwriting to prove evidence of insurability, which can affect the coverage and premiums of the new policy. To avoid an Errors and Omissions claim, the producer must not be negligent, or make false statements or misrepresentations. Retention Question 12 Replacement of health or disability insurance generally requires that the new policy must do which of these? a. Lower the insured s annual premium by a minimum of 5% b. Materially improve the insured s position in all or nearly all respects c. Increase the premium and reduce the benefits provided d. Promise to increase the benefits provided without an increase in premium 114

12 HEALTH BASICS Chapter Eight Lightning Facts 1. Health insurance (accident & health) provides coverage for both accidental injuries and medical losses due to disease or other illnesses Disability income insurance pays weekly or monthly benefits due to insured accidents or illnesses. The benefit is either a percentage of the insured s past earnings or a flat dollar amount Accidental Results defines loss only on the basis of an unintended result, even if an injury might have been an expected outcome of a person s actions. Although the insured may have contributed to or even caused the loss, if the injury was not intentional, it will be covered Accidental Means defines loss on the basis of both cause and result. For an accidental means policy to pay a claim, both the cause and the result must be unintended and unforeseen. It is more restrictive and disallowed in some states The Morbidity Table shows the mathematical probability of a loss due to a sickness and is comparable to the Mortality Table used for rating life insurance Pre-existing conditions are those for which a person received treatment, advice, or diagnosis within a specified period before the policy s effective date A probationary period defines the number of days beginning with the first day of a new health insurance policy during which there will be no coverage for medical claims due to sickness Sickness is any non-accidental disease or illness, commencing after the policy has been in force for at least 30 days Health insurance claims are generally subject to subrogation an insurer s legal right of recovery. Losses which are the responsibility of a third party will be covered, but the insurer has the right to reimbursement from the responsible third party for up to 100% of its paid losses An Accidental Death and Dismemberment ( AD&D ) policy is a limited form of health insurance which provides benefits for accidental death, loss of sight, or loss of two limbs. It may be added as a rider to Disability Income, Medical Expense or Life Insurance policies A principal sum is the maximum benefit payable under the terms of the AD&D policy and is payable for accidental death or double dismemberment A capital sum is the amount payable for lesser accidental dismemberment losses Health insurance is available in both individual and group forms. Coverage is primarily available from private health insurers, but there are also governmental plans available to persons with limited or no resources to pay premiums, such as Medicare, Medicaid, and TRICARE for families of service members Health and disability insurance is generally classified as either limited or comprehensive, based on the type and/or amount of benefits payable. Comprehensive plans cover a broader range of losses and have larger policy limits Advertisements are regulated to ensure accuracy, prevent unfair competition, and set a minimum standard of conduct. Insurers are required to maintain copies of all advertisements used Solicitation of health and disability insurance by telephone is governed under the Telephone Sales Rule. Unless advance permission has been obtained from a prospect, a producer may not contact any person by phone whose number is listed in the federal Do Not Call Registry Health insurance is more susceptible to adverse selection than life insurance, and for this reason producers are relied upon by their insurers to probe beyond the stated questions. This is known as field underwriting and is the initial step in determining a person s insurability

13 CHAPTER EIGHT 18. The producer and the applicant are required to sign the application for health or disability insurance. Some companies require the applicant to fill out the application in the agent s presence and other companies require the agent to complete the application Incomplete applications may delay the insurer s underwriting and issuance of the policy. Applicants must understand that they are responsible for providing only information that is true and complete to the best of their knowledge If coverage is issued with unanswered questions in the application, coverage will be provided and the information requested by the questions is considered to have been waived by the insurer Consideration in the form of the first premium payment is required for coverage to be in effect. Coverage begins when the application is approved and the policy has been issued Health insurance applications are subject to standard notices of information collection practices. The Medical Information Bureau (MIB) will provide, upon request, the explanation(s) for why coverage was denied, which allows the applicant to check the accuracy of the MIB s information Insurance producers are usually required to obtain and maintain Errors & Omissions ( E&O ) insurance to protect against claims of negligence. Negligence includes quoting inflated information or misrepresenting a plan of coverage. Inadequacy includes failing to obtain the proper type or amount of coverage for a client Replacing health insurance and disability income or long-term care insurance requires special care in comparing limits of coverage, benefits, and exclusions between the existing and replacing policies A replacement policy may require new periods of probation and exclusions for pre-existing conditions. The agent must ensure that the old policy is not canceled before the new policy is issued