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Question

Difficulty: HardInitial Premium and Premium Receipts

On July 10, Elena applies for a $1,000,000 life insurance policy, pays the initial premium, and receives a conditional insurability receipt. The insurer requires a standard medical examination due to the policy's face amount, which she completes on July 15. On July 18, Elena dies in a fatal car accident. On July 20, unaware of her death, the insurer's underwriters review her medical results and determine she does not qualify for the standard rate she applied for. Instead, they approve a counteroffer for a substandard policy with a higher premium. How will the insurer handle the death benefit claim filed by Elena's beneficiary?

  1. The insurer will deny the death benefit claim and refund the initial premium to the beneficiary.Answer
  2. B
    The insurer will pay the full $1,000,000 death benefit because coverage became retroactively effective on the date of the medical examination.
  3. C
    The insurer will pay a reduced death benefit calculated by the amount of coverage the initial premium would have purchased at the substandard rate.
  4. D
    The insurer will deny the claim and retain the initial premium because the counteroffer policy was legally issued by the underwriters on July 20.

Answer

The insurer will deny the death benefit claim and refund the initial premium to the beneficiary.
Under a conditional insurability receipt, coverage is only effective retroactively (to the later of the application date or medical exam date) if the applicant is ultimately found to be insurable at the applied-for risk classification and premium rate. Because the underwriters determined she was uninsurable at the applied rate and instead issued a counteroffer, the primary condition of the receipt was not met. Therefore, no life insurance coverage existed at the time of her death, and the insurer's only legal obligation is to refund the initial premium.

Step-by-Step Solution

1
Identify the type of receipt and its exact conditions.
The receipt is a conditional insurability receipt.
This receipt dictates that coverage is only effective retroactively if the applicant is found to be insurable at the applied-for risk classification and premium rate.
2
Determine the relevant chronological dates and events.
Application Date: July 10. Exam Date: July 15. Death: July 18. Underwriting Decision: July 20.
Tracking the timeline is necessary to see if the required conditions for retroactive coverage were met before the loss occurred.
3
Evaluate the underwriting decision against the receipt's conditions.
The underwriters determined she was uninsurable at the applied standard rate and issued a counteroffer.
Because she did not qualify for the specific policy she applied and paid for, the condition of the receipt was explicitly failed.
4
Determine the insurer's liability based on the failed condition.
No coverage was in effect on the date of death, so the claim is denied and the premium is refunded.
A conditional receipt does not provide interim coverage if the applicant is ultimately found uninsurable for the applied rate.

Key Concept

Conditional Insurability Receipts and Substandard Counteroffers
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Topics

Initial Premium and Premium Receipts

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