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Difficulty: EasyInitial Premium and Premium Receipts

Lisa completes a life insurance application and submits the initial premium. Her agent issues a conditional receipt on March 1. The application does not require a medical exam. On March 10, before the physical policy is issued, Lisa dies in a severe auto accident. The insurance company's underwriter later determines that on March 1, Lisa met all the requirements to be insured as a standard risk. What action will the insurance company take regarding the death benefit claim?

  1. The company will pay the full death benefit to the beneficiary.Answer
  2. B
    The company will refund the initial premium only because the policy was not physically delivered.
  3. C
    The company will deny the claim because the final policy approval had not been issued.
  4. D
    The company will only pay the claim if the agent obtained a Statement of Good Health before the accident.

Answer

The company will pay the full death benefit to the beneficiary.
When an agent collects the initial premium and issues a conditional receipt, coverage takes effect on the date of the application (or the date of a required medical exam, whichever is later) as long as the underwriter determines the applicant was insurable as a standard risk on that date. Since Lisa was insurable on March 1, the coverage was actively in force when she died on March 10, obligating the insurer to pay the death benefit.

Step-by-Step Solution

1
Identify the type of receipt given to the applicant.
The agent issued a conditional receipt on March 1 upon collecting the initial premium.
The type of receipt determines the rules for when coverage becomes effective.
2
Determine the conditions required for the coverage to become retroactively effective.
Under a conditional receipt, the applicant must be found insurable as a standard risk as of the application date (since no medical exam was needed).
This is the foundational legal rule governing conditional receipts in life insurance.
3
Apply the facts of the scenario to the condition.
The underwriter determined Lisa was insurable as a standard risk on March 1, meaning the policy was in force when she died on March 10.
Because the conditions of the receipt were met, the insurer is legally obligated to fulfill the death benefit.

Key Concept

Under a conditional receipt, coverage becomes effective retroactively on the date of application (or medical exam, if required) provided the applicant is ultimately found to be insurable at a standard rate.
Estimated Time:45s
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Topics

Initial Premium and Premium Receipts

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