Collecting the initial premium and issuing the receipt

Why the initial premium is a separate lesson

A life insurance application is an offer. On its own it creates no coverage, and the insurer is free to decline it. What changes the picture is money: when the applicant pays the first premium along with the application, the offer becomes one the insurer can accept simply by issuing the policy, and -- under the receipt the producer hands over -- coverage may begin before the underwriter has even opened the file. When no money changes hands at the application, the insurer's issued policy is only a counter-offer, and nothing is in force until the premium is paid at delivery. The exam tests both paths and the receipt that sits between them.

Path one: premium collected with the application

The normal and preferred practice is to collect the full initial premium when the application is signed. The producer then issues a premium receipt to the applicant. Two kinds of receipt appear on exams, and the difference is what the receipt promises.

The conditional receipt

The conditional receipt is the common one. It says that coverage is in effect from a stated date on condition that the insurer later finds the proposed insured insurable, at the rate class and for the plan applied for. The usual form is the insurability conditional receipt: coverage is effective as of the date of the application, or the date of the medical examination if one is required and it comes later, provided the applicant turns out to be insurable as a standard risk. The underwriting happens after the fact, but the effective date reaches back.

The practical payoff: if the proposed insured dies before the policy is issued and the underwriter would have approved the application as applied for, the death benefit is paid. If the underwriter finds the applicant uninsurable, or insurable only at a rating the receipt did not contemplate, there was never any coverage under the receipt and the premium is refunded.

A less generous form is the approval conditional receipt, under which coverage does not begin until the insurer actually approves the application -- there is no reach-back to the application date. Learners should know both exist; the insurability form is the one most exam questions describe as the conditional receipt.

The binding (temporary insurance) receipt

A binding receipt, sometimes called a temporary insurance agreement, is different in kind: it provides coverage immediately upon payment, for a limited period (often 30 to 60 days) and usually up to a stated maximum amount, whether or not the applicant is ultimately found insurable. Because the insurer is on the risk before underwriting, binding receipts are uncommon in life insurance; they are the norm in property and casualty lines. Exam questions that describe coverage "regardless of insurability" are describing a binding receipt, not a conditional one.

Path two: no premium with the application

If the applicant does not pay at the application, the producer submits the application without premium and the insurer, if it approves the risk, issues the policy for delivery cash on delivery. Two things then happen when the producer delivers the policy:

1. The producer collects the initial premium. Coverage does not begin until the premium

is paid and the policy is delivered; the issued policy is the insurer's counter-offer, and paying the premium is the applicant's acceptance.

1. The producer obtains a signed statement of continued good health (statement of good

health) from the insured, confirming that nothing about the insured's health has changed since the application. The insurer relies on that statement because its underwriting information may be weeks old, and a material change in the meantime could void the contract.

The producer should never leave a policy with an applicant who has not paid. A policy left on the kitchen table without premium is not a contract in force, and the applicant may believe otherwise.

Handling the money

The producer is a fiduciary for premium funds -- money collected from the applicant belongs to the insurer from the moment it is received, and it must be forwarded promptly, never commingled with the producer's own funds and never "held" while the producer decides whether to submit the application.

• A check for the initial premium is made payable to the insurer, never to the producer

personally. A producer who accepts a check in his or her own name has taken the client's money as a personal debt and put the receipt at risk.

• If the initial premium check is dishonored, no premium has been paid. Any receipt

that depended on payment is ineffective, and the contract is treated as never having begun unless the applicant promptly makes the payment good.

• Single-premium life policies: Florida requires that the premium for a single-premium

life policy be paid in cash, although the usual and customary payment methods permitted by rule -- and the use of dividends to buy paid-up additions -- are not affected (Fla. Stat. s. 627.480).

• The receipt itself should be completed accurately and given to the applicant at the time

of payment; it is the applicant's only evidence of what was paid and what coverage, if any, is in effect during underwriting.

The effective date, side by side

• Premium paid, insurability conditional receipt: coverage is effective as of the later

of the application date or the medical exam date, if the applicant is found insurable as applied for.

• Premium paid, approval conditional receipt: coverage is effective on the date the

insurer approves the application.

• Premium paid, binding receipt: coverage is effective immediately, for the limited

period and amount stated, regardless of insurability.

• No premium with the application: coverage is effective when the policy is delivered

and the premium is paid, with a statement of good health signed.