Examkin

Question

Difficulty: HardInitial Premium and Premium Receipts

On November 2, an applicant completes an application for a $750,000 universal life policy. The agent collects the initial annual premium and provides a conditional insurability receipt. Due to the applicant's medical history, a comprehensive medical examination is required.

The applicant completes the medical examination on November 6.

On November 9, before the policy is issued or delivered, the applicant dies from an unexpected stroke. Upon reviewing the file post-mortem, the insurer's underwriting department determines that the applicant would not have qualified for the standard premium rate applied for, but instead would have been offered a rated policy with a premium surcharge.

Based on standard life insurance conditional receipt rules, which of the following statements are correct? (Select all that apply)

  1. A
    The insurer is obligated to pay the full death benefit because the applicant completed the required medical examination prior to death.
  2. The insurer's only financial obligation is to refund the initial premium paid to the applicant's beneficiary or estate.Answer
  3. The coverage would have become retroactively effective on November 6 if the underwriters had approved the applicant as a standard risk.Answer
  4. D
    The agent established unconditional temporary coverage the moment the initial premium was collected on November 2.

Answer

The statements confirming that the insurer's only obligation is to refund the premium, and that coverage would have been retroactively effective on November 6 if approved as standard, are correct.
A conditional insurability receipt stipulates that coverage is effective as of the date of the application or the date of the medical exam (whichever is later), provided the applicant is found insurable at the premium class applied for. Because the applicant required a medical exam on November 6, that would have been the effective date if approved as a standard risk. However, since the underwriters determined the applicant was a substandard risk requiring a rated policy, the conditions of the receipt were not met. Therefore, no coverage was in force at the time of death, and the insurer must simply refund the initial premium.

Step-by-Step Solution

1
Determine the rules for a conditional insurability receipt when an applicant dies before policy issuance.
Coverage is effective retroactively only if the applicant is found insurable at the rate applied for.
This is the fundamental condition that must be met for a conditional receipt to trigger coverage.
2
Analyze the underwriter's findings regarding the applicant's risk class.
The applicant was deemed a substandard risk who would have received a counteroffer with a premium surcharge, not the standard rate applied for.
To establish whether the condition of insurability was satisfied.
3
Identify the insurer's liability based on the unfulfilled condition.
Since the condition was not met, the insurer is not liable for the death benefit and must refund the collected premium.
A counteroffer negates the original offer, meaning no contract was formed.
4
Evaluate the alternative scenario regarding the effective date of coverage.
If the applicant had been approved as a standard risk, the effective date would be November 6 (the date of the medical exam).
A conditional receipt makes coverage effective on the date of the application or the medical exam, whichever is later.

Key Concept

Conditional Insurability Receipts and Substandard Risk
Rate this question

Topics

Initial Premium and Premium Receipts

More questions from this topic