Illinois Insurance State Practice Exam

If a service fee is refunded after a policy cancellation, which type is applicable?

1. Flat refund

2. Prorated refund

3. No refund

4. Full refund

The correct answer is: Prorated refund

When a service fee is refunded after a policy cancellation, a prorated refund is applicable because it reflects the amount of time the policy was in force versus the time for which the service was paid. A prorated refund allows for the calculation of the fee based on the duration that the policy was active, thus ensuring that the policyholder receives a reimbursement that corresponds to the actual coverage period. In this scenario, a flat refund would imply a fixed amount is returned regardless of the time of coverage, which does not accurately represent the refund based on service use. A full refund would indicate that the entire fee is returned without consideration of any portion of coverage used, which may not be appropriate in the case of partial service. The option of no refund would suggest that the fee is non-refundable under any condition, which does not apply here since a refund is indeed occurring. Therefore, a prorated refund correctly accounts for the service time utilized and provides a fair adjustment to the policyholder.