Connecticut Life Producer Practice exam

If a life settlement contract is rescinded, what is the status of the settlement proceeds?

1. The proceeds must be retained until further notice.

2. The proceeds should be returned to the insurer.

3. The proceeds will be forfeited.

4. The proceeds can be invested by the insured.

The correct answer is: The proceeds should be returned to the insurer.

When a life settlement contract is rescinded, the proceeds from that contract must be returned to the insurer. This reflects the principle that if the contractual relationship is nullified, any financial gains resulting from that contract are also void. The purpose of the rescission is to return parties to their pre-contractual state, which necessitates the return of funds involved in the settlement process to the original payer—typically the insurance company. The other choices do not accurately capture the legal and financial implications of a rescission. For instance, retaining proceeds without action does not align with the return to the initial status that rescission necessitates. Forfeiture of proceeds contradicts the process, as under the rescission, funds are expected to be returned rather than lost. Allowing the proceeds to be invested by the insured similarly misinterprets the obligation to return those funds to the insurer, as the insured should not maintain any benefit from a contract that has been invalidated.