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Difficulty: MediumInitial Premium and Premium Receipts

On March 5th, a 50-year-old truck driver applies for a $200,000 term life insurance policy, pays the initial premium, and is issued a conditional insurability receipt. The application requires a medical examination, which he successfully completes on March 8th. On March 12th, before the policy is issued, he dies unexpectedly from a severe stroke. During the underwriting process of the deceased applicant's file, the insurer determines that due to high blood pressure discovered during the medical exam, he would have been classified as a substandard risk requiring a higher premium, rather than the standard rate he applied for.

What is the insurer's obligation regarding the death benefit claim?

  1. The insurer will refund the initial premium and deny the claim because the applicant was not insurable at the standard rate applied for.Answer
  2. B
    The insurer will pay the full $200,000 death benefit because the required medical exam was completed prior to the applicant's death.
  3. C
    The insurer will pay the claim because the agent's acceptance of the initial premium created an immediate binding contract.
  4. D
    The insurer will deny the claim specifically because a Statement of Good Health was not signed following the medical exam.

Answer

The insurer will refund the initial premium and deny the claim because the applicant was not insurable at the standard rate applied for.
The correct answer accurately applies the rule of conditional insurability receipts. Because the applicant was determined to be a substandard risk, he did not meet the underwriting conditions for the standard policy he originally applied for. Therefore, no coverage was in effect, and the insurer's only obligation is to refund the initial premium.

Step-by-Step Solution

1
Analyze the type of receipt issued to the applicant.
The applicant received a conditional insurability receipt upon paying the initial premium.
The specific type of receipt dictates the rules for when coverage becomes effective.
2
Identify the conditions required for coverage to become effective retroactively.
Coverage would become effective on the date of the medical exam (March 8th) provided the applicant was insurable as a standard risk as applied for.
Conditional receipts require the applicant to meet the insurer's normal underwriting guidelines for the requested rate class.
3
Determine if the conditions for coverage were met prior to the applicant's death.
The underwriter determined the applicant was a substandard risk due to high blood pressure, meaning he was not insurable at the standard rate.
Since the condition of insurability at the requested rate was not met, no coverage was in effect at the time of death, obligating the insurer to return the premium.

Key Concept

Under a conditional insurability receipt, temporary coverage is only effective if the applicant is ultimately found to be insurable at the premium class applied for. If they are determined to be a substandard risk requiring a higher premium, no coverage exists unless a counteroffer is accepted.
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Topics

Initial Premium and Premium Receipts

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