Initial premium collection and receipt consequences

Why the first premium matters

In life and health insurance, when the first premium is collected, and what receipt the applicant gets for it, decides when coverage can begin. A producer who collects the initial premium with the application is doing more than taking money: the payment changes the legal position of the applicant, the producer and the insurer while the application is in underwriting.

A decision chart titled Initial premium and when coverage starts. At the top is the question: was premium paid with the application? The No branch leads to a red box: no coverage during underwriting; coverage starts at delivery when the first premium is paid and a statement of good health is signed. The Yes branch leads to a green box, producer gives a premium receipt, which splits into three boxes. Conditional: covered from the later of the application or exam date, if the applicant is insurable as applied for. Approval: covered only once the insurer approves. Binding: covered at once, for a limited time or amount, until the insurer acts. A note across the bottom reads: declined means a full refund; issued rated or changed is a counteroffer accepted at delivery; a dishonored check is no payment, so no coverage attaches. — How paying the first premium, and the type of receipt, set when coverage begins

No premium with the application

If the applicant submits the application without paying, there is no coverage during underwriting. In contract terms, the application is only an invitation for the insurer to make an offer. If the insurer approves the risk and issues the policy, that issued policy is the offer, and the applicant accepts it by paying the first premium when the producer delivers the policy.

Because time has passed since the application, the producer at delivery normally collects the premium and has the applicant sign a statement of good health (also called a statement of continued insurability), confirming the applicant's health has not changed. Coverage starts only when both happen.

Premium paid with the application

When the applicant pays the first premium with the application, the application plus premium is the offer, and the insurer accepts by issuing the policy as applied for. The producer gives the applicant a premium receipt, and the type of receipt controls what happens if a loss occurs before the policy is issued.

Conditional receipt (insurability type). The most common. Coverage becomes effective on the date of the application or the date of the medical exam, whichever is later, but only on the condition that the applicant is found insurable, as applied for, under the insurer's normal underwriting rules. If the applicant dies before underwriting is finished and would have qualified, the insurer pays. If the applicant would not have qualified, the insurer owes only a refund of the premium.
Approval-type receipt. Coverage begins only when the insurer approves the application. Until then there is no protection, so it offers the applicant little more than a record that money was paid.
Binding receipt (temporary insurance agreement). Coverage begins immediately on the application date, usually for a limited period or amount, and lasts until the insurer issues the policy or declines the risk. The insurer is bound during that period even if the applicant later turns out to be uninsurable. Binders are routine in property and casualty insurance and less common in life insurance.

When the insurer does not issue as applied for

Declined: the full premium is refunded.
Issued rated or with changes: this is a counteroffer, not acceptance. The applicant must accept it, typically at delivery by paying any additional premium and signing a new statement of good health, before coverage is in force. A conditional receipt does not provide coverage for a policy different from the one applied for.
Payment fails: a premium check that is dishonored is not payment, so coverage that depended on that payment does not attach.

The producer's duties with the money

Premiums collected by a producer belong to the insurer. The producer holds them in a fiduciary capacity.

Give the applicant a receipt for every initial premium collected.
Have checks made payable to the insurer, not the producer.
Keep premium funds separate from personal money (no commingling) and remit them promptly.
Collect exactly the premium the policy calls for -- never more, never less. Charging a different amount than the approved rate is an unfair trade practice.
Explain to the applicant what the receipt does and does not do, so the applicant does not assume coverage that is not yet in force.