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Question

Difficulty: MediumInitial Premium and Premium Receipts

On March 4, David submits an application for a $400,000 life insurance policy, hands the producer a check for the first premium, and is issued a conditional insurability receipt. The underwriting process requires a routine medical examination, which David undergoes on March 11. On March 18, the home office underwriter determines that David has elevated blood pressure and classifies him as a substandard risk, issuing the policy with a premium surcharge. On March 20, before the producer can deliver the newly rated policy and collect the additional required funds, David suffers a fatal heart attack. Based on these events, what action will the insurer take regarding the death benefit claim?

  1. Decline the claim and return the collected funds to the estate, since the applicant did not meet the underwriting criteria for the policy as applied.Answer
  2. B
    Disburse the $400,000 benefit, as the conditional receipt made coverage retroactive to the completion of the medical examination.
  3. C
    Process the claim for a proportionately lower death benefit based on what the collected funds would purchase at the substandard classification.
  4. D
    Remit the full face amount because the producer accepted the initial payment, immediately transferring the risk to the insurer.

Answer

The insurer will decline the claim and return the initial premium, as the conditional receipt does not apply when an applicant is classified as a substandard risk.
A conditional insurability receipt only provides retroactive coverage if the applicant is ultimately approved by the underwriter at the risk class and premium amount initially applied for. Because David was classified as a substandard risk, the insurer's issuance of a rated policy constituted a counteroffer rather than an acceptance. Since David died before he could accept the counteroffer and pay the required premium surcharge, the policy never went into effect. Therefore, the insurer's only legal obligation is to return the initial payment to his estate.

Step-by-Step Solution

1
Identify the type of receipt and its conditions.
A conditional insurability receipt was issued, which provides coverage retroactive to the date of the application or medical exam (whichever is later).
This establishes the potential starting point for coverage.
2
Evaluate if the conditions for retroactive coverage were met.
The applicant was found to be a substandard risk, not the standard risk he applied for.
A conditional receipt only triggers retroactive coverage if the insurer determines the applicant was insurable exactly as applied for.
3
Determine the legal status of the rated policy.
Issuing a policy with a premium surcharge constitutes a counteroffer by the insurer.
The original offer (the application) was rejected in favor of a new offer with modified terms.
4
Conclude the liability of the insurer upon the applicant's death.
Because the applicant died before accepting the counteroffer and paying the additional premium, no contract was formed. The insurer must deny the claim and refund the initial deposit.
An insurance contract requires a meeting of the minds and full consideration, which did not occur here.

Key Concept

Initial Premium and Premium Receipts
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Topics

Initial Premium and Premium Receipts

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