On August 10th, a small business owner completes a life insurance application, pays the first modal premium, and is issued a conditional insurability receipt by the producer. The insurer requires a routine medical examination, which the applicant successfully completes on August 15th. Tragically, the applicant suffers a fatal heart attack on August 18th before the home office reviews the file. During the subsequent underwriting review on August 22nd, the insurer determines that the applicant met all requirements for a standard risk classification as of the medical exam date. Based on these facts, how must the insurer respond to the death claim?
- ARefund the premium without paying the death benefit because the formal policy had not been issued prior to the applicant's death.
- BDecline the claim because a Statement of Good Health could not be signed by the applicant at the time of policy delivery.
- Pay the full death benefit because coverage became retroactively effective on the date of the required medical examination.Answer
- DPay the claim only if the producer had the express authority to issue an unconditional binding receipt on the application date.
Answer
The insurer must pay the full death benefit because coverage became retroactively effective on the date of the required medical examination.
Under a conditional insurability receipt, interim coverage becomes effective on the date of the application or the date of the required medical exam, whichever is later, provided the applicant is ultimately approved as a standard risk. Because the applicant completed the exam on August 15th and was later determined to be insurable on that date, coverage retroactively started on August 15th. Therefore, the insurer is legally obligated to pay the death claim.
Step-by-Step Solution
Key Concept
Conditional Receipts and Effective Date of Coverage