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Question

Difficulty: MediumInitial Premium and Premium Receipts

During a meeting with his agent on November 3, Jonathan completes an application for a substantial life insurance policy. He submits the first premium payment along with the application and is handed a conditional insurability receipt. The insurer's underwriting guidelines require Jonathan to undergo a medical evaluation, which he successfully completes on November 10. Tragically, Jonathan dies in a car collision on November 14, while his application is still pending review at the insurer's home office. During the subsequent claim investigation, the underwriter confirms that Jonathan was insurable as a standard risk on the date of his medical evaluation. Based on these circumstances, what is the legal obligation of the insurance company regarding the death claim?

  1. A
    The company will return the premium without paying the benefit because final underwriting approval had not been granted prior to his death.
  2. The company is obligated to pay the entire death benefit because coverage became effective retroactively on the date the medical evaluation was completed.Answer
  3. C
    The company must pay the death benefit because the conditional receipt initiated binding coverage immediately on November 3 when the initial premium was collected.
  4. D
    The company is exempt from paying the claim because the agent could not secure a signed Statement of Good Health at the time of policy delivery.

Answer

The company is obligated to pay the entire death benefit because coverage became effective retroactively on the date the medical evaluation was completed.
When a conditional insurability receipt is issued and a medical examination is required, coverage becomes effective on the later of the application date or the date of the medical examination, provided the applicant is found to be insurable at the applied-for risk class. Since Jonathan was found insurable as a standard risk based on his November 10 medical evaluation, coverage was retroactively effective on that date. Therefore, the insurer is liable for the death claim.

Step-by-Step Solution

1
Identify the receipt type and initial premium status.
Jonathan paid the initial premium and received a conditional insurability receipt on November 3.
The type of receipt and payment status determine how and when coverage takes effect.
2
Determine the effective date of coverage based on the receipt rules.
Because a medical evaluation was required by the insurer, the potential effective date shifted from the application date to the date of the medical evaluation (November 10).
Under a conditional receipt, coverage is effective on the later of the application date or the medical exam date.
3
Evaluate the applicant's insurability on the effective date.
The underwriter confirmed Jonathan was insurable as a standard risk on November 10.
Conditional receipts only trigger retroactive coverage if the applicant is ultimately found insurable as applied for.
4
Conclude the insurer's liability for the claim.
Because Jonathan was insurable on the effective date (November 10), coverage was active when he died on November 14. The insurer must pay the full death benefit.
The conditions of the receipt were fully met prior to his death, legally binding the insurer to the claim.

Key Concept

Initial Premium and Conditional Receipts
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Topics

Initial Premium and Premium Receipts

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