Arkansas Life and Health Insurance Practice Exam

Why should a producer collect a premium at the time the application is completed?

1. Because it serves as a binding contract

2. It ensures the application is processed faster

3. It proves the applicant's financial stability

4. Without it, coverage cannot go into effect, as there would be a lack of consideration

The correct answer is: Without it, coverage cannot go into effect, as there would be a lack of consideration

By collecting a premium at the time the application is completed, the producer ensures that there is consideration for the insurance contract. Consideration is a necessary element of a legal contract, and without it, the contract may not be valid or enforceable. Therefore, collecting the premium at the time of application allows the coverage to go into effect and the insurance policy to be in force. This is why the correct answer is D. Option A is incorrect because collecting a premium does not solely serve as a binding contract; other elements are required for a contract to be legally binding. Option B is incorrect because collecting a premium may not necessarily speed up the application process; the processing time can depend on various factors. Option C is incorrect because collecting a premium does not necessarily prove the applicant's financial stability; financial stability can be assessed through other means in the underwriting process.