Collecting the initial premium and issuing the receipt

Why the first premium matters

When a producer takes a life insurance application, the most important question after the health and financial answers is whether the applicant pays the initial premium now. Collecting it with the application does three things. It shows the applicant is serious, which cuts down on policies that are issued and then never taken. It can speed delivery, because the first premium is already paid, although a rated or changed offer still needs the applicant's acceptance and any extra premium. And, most important for the exam, it is what makes interim coverage possible. No premium, no receipt; no receipt, no coverage before the policy is delivered.

Handling the money

A premium a producer collects is not the producer's money. It belongs to the insurer (or, if the application is declined, to the applicant), and the producer holds it in a fiduciary capacity. That means:

The check is normally made payable to the insurer, never to the producer personally.
Premium funds are not commingled with the producer's own money unless the producer's principal, usually the insurer, has expressly consented, and they are not used for personal or business expenses.
Funds are remitted promptly to the insurer under its rules, with the application.
Using premium money for yourself is misappropriation (conversion), a ground for license discipline and often a crime.

The premium receipt

When the producer accepts the initial premium, the applicant gets a premium receipt. Its wording decides when coverage starts. The producer must explain that wording; an applicant who thinks they are covered when they are not has been misled.

Conditional receipt, insurability type (the most common). Coverage takes effect as of the date of the application or the medical exam, whichever is later, on the condition that the insurer later finds the applicant insurable as applied for under its normal underwriting rules. If the applicant dies before the policy is issued but would have qualified, the insurer pays. If they would not have qualified, it refunds the premium and pays nothing.

Conditional receipt, approval type. Coverage starts only when the insurer approves the application. There is no coverage between application and approval, so it gives the applicant little protection. It is rare today.

Binding receipt (a temporary insurance agreement). Coverage starts immediately and lasts for a limited period, usually until the insurer accepts or rejects the application, whether or not the applicant turns out to be insurable. Because the insurer is bound before it underwrites, binding receipts usually cap the amount and the duration.

If no premium is collected

If the applicant pays nothing up front, there is no interim coverage at all. Coverage begins only when the policy is delivered, the first premium is paid, and the applicant usually signs a statement of continued good health confirming nothing has changed since the application. The producer collects the premium and the statement at delivery.

When the policy is not issued as applied for

A conditional receipt promises coverage only on the terms applied for. If the insurer rates the policy (charges a higher premium) or offers a different plan, that is a counteroffer. No coverage exists on the new terms until the applicant accepts it, usually at delivery when any extra premium is paid. A declined applicant gets the premium back.

A timeline runs left to right through four events: application, medical exam, underwriting approval, and policy delivery. Below it are four bars showing when the applicant is covered. The binding receipt bar starts at the application and runs to the end, covering the applicant immediately whether or not they are insurable, for a limited amount and time. The insurability conditional receipt bar starts at the later of the application or the medical exam and runs to the end, but only if the applicant is found insurable as applied for. The approval conditional receipt bar starts only at underwriting approval. When no premium is paid, there is no bar until policy delivery, when the first premium is paid and a statement of continued good health is signed. — Coverage start under each type of premium receipt

Exam tip: The question is always when does coverage start. Binding: right away, insurable or not. Insurability conditional: back-dated to the application or exam, if insurable. Approval conditional: at approval. No premium: at delivery.