Examkin

Question

Difficulty: MediumInitial Premium and Premium Receipts

On April 4th, a 55-year-old civil engineer completes an application for a whole life insurance policy, submits the first premium payment, and receives a conditional receipt from the agent. The insurer's underwriting process requires a medical examination, which the applicant completes on April 8th. On April 11th, the applicant is fatally injured in a workplace accident. During the routine underwriting review on April 14th, the insurer determines that based on the medical exam results, the applicant would have been classified as a substandard risk requiring a higher premium than what was initially paid. What is the insurer's legal obligation regarding the claim filed by the applicant's beneficiary?

  1. The insurer must deny the death benefit claim and refund the initial premium because the applicant was not insurable at the standard rate applied for.Answer
  2. B
    The insurer must pay the full death benefit because the applicant completed the required medical examination before the accident occurred.
  3. C
    The insurer must pay a reduced death benefit equal to the amount of coverage the initial premium would have purchased at the substandard rate.
  4. D
    The insurer must pay the full death benefit because the agent's acceptance of the initial premium legally bound the company to provide immediate coverage.

Answer

The insurer must deny the death benefit claim and refund the initial premium because the applicant was not insurable at the standard rate applied for.
Under a standard conditional receipt, coverage becomes effective retroactively to the date of the application or the required medical exam, whichever is later, strictly on the condition that the applicant is found insurable as a standard risk. Because the applicant was determined to be a substandard risk, the condition for coverage was never met. The insurer's substandard rating acts as a counteroffer, which cannot be accepted since the applicant is deceased. Therefore, the insurer's only obligation is to refund the initial premium.

Step-by-Step Solution

1
Identify the type of premium receipt issued and its conditions.
A conditional receipt was issued, meaning coverage is contingent upon the applicant being insurable at the standard rate applied for.
This establishes the legal framework for when coverage becomes effective.
2
Determine the earliest possible effective date of coverage.
The medical exam was completed on April 8th, which would be the effective date if all conditions were met.
Under a conditional receipt requiring a medical exam, coverage takes effect on the application date or exam date, whichever is later.
3
Evaluate the underwriting decision against the receipt's conditions.
The applicant was classified as a substandard risk, not a standard risk.
The requirement that the applicant be insurable at the standard rate was not satisfied.
4
Conclude the legal outcome based on the unmet condition.
No coverage was in effect at the time of death, so the claim is denied and the premium is refunded.
Because the applicant required a substandard premium, a counteroffer would have been necessary, but the applicant died before a policy could be issued and accepted.

Key Concept

Conditional Receipt Rules for Substandard Risks
Rate this question

Topics

Initial Premium and Premium Receipts

More questions from this topic