When Pete, the insured, cancels his credit life policy, how must his unearned refund be calculated if the premium was paid with a single payment?

The unearned refund for a canceled credit life policy is calculated using the sum of years digits rule. This method is commonly applied in life insurance scenarios when premiums have been paid in a lump sum, as is the case here.

In the sum of years digits method, the total number of years of the policy is first summed up and then a portion of the premium is returned based on how long the policy was in force. The idea is to provide a refund that reflects the premium allocation based on coverage duration—the longer the policy is in force, the more premium is earned by the insurer. This approach considers that the refunds decrease progressively over time rather than being uniform across the policy period.

This method ensures that the insured receives a refund that accurately reflects the actual insurance coverage provided up to the point of cancellation, aligning with the principle of fairness in premium calculation. The other methods mentioned, like the pro-rated method or the fixed rate method, do not account for the term of the policy in the same way and may not accurately represent the corresponding earned premium for the time coverage was provided.