What are the two types of premium receipts?

The agent should be familiar with the types of receipts available and be able to explain the differences to the applicant at the time. There are two types of receipts: (1) The conditional receipt and (2) the binding receipt.

The conditional receipt contains two subcategories as well: (1) Insurability and (2) approval.

The insurance agent should collect the first full installment from the applicant at the time of application. The conditional receipt is the most common form of receipt, but it is not a full receipt. This means that the applicant and the company have formed what might be called a "conditional contract" - one contingent upon conditions that existed at the time of application or when a medical examination is completed. It provides that the applicant is covered immediately from the date of application as long as he or she passes the insurer's underwriting requirements. It is the producer's responsibility to explain that the applicant is covered on the condition that he or she proves to be insurable - and passes the medical examination, if required.

A conditional receipt gives the company time to process the application and to issue or refuse the policy. If the applicant were to die before a policy is issued, the company will pay the death benefit but only if the policy would have been issued.

There are also two different types of conditional receipts.

Insurability Conditional Receipt

The insurability conditional receipt is the type of receipt that is the most frequently used conditional receipt and is based on the condition that the applicant proves to be insurable. If the applicant is found to be insurable, the effective date of the policy is the date on the receipt (the date the initial premium payment was received). Even if it takes the insurance company as long as a month to process and deliver the policy, the effective date remains the date of the receipt.

Approval Receipt

The approval receipt states that the effective date of the policy is the date of approval, even before policy delivery. This type of receipt is rarely used today as they are not looked upon favorably by the courts.

What Is a Conditional Binding Receipt?

A conditional binding receipt is involved in life, health, and certain property insurance contracts; if the insured is deemed to be covered by the insurer, the coverage begins on the date the insured receives the conditional binding receipt.

Typically, a premium payment must be received by the insurer along with a completed acceptable application in order for the insured to obtain the receipt. This may also be called a "conditional receipt" or a "binding receipt," depending on the type of insurance.

Key Takeaways

• A conditional binding receipt is involved in life, health, and certain property insurance contracts. 
• If the insured is deemed to be covered by the insurer, the coverage begins on the date the insured receives the conditional binding receipt. 
• A life and health insurance policy without a conditional binding receipt is not effective until it is delivered to the insured and the premium is paid.
• The function of a conditional binding receipt can actually be divided into two separate receipts: a conditional receipt and a binding receipt.

Understanding Conditional Binding Receipts

If a premium accompanies an application, a conditional binding receipt provides that coverage will be in force from the date of application or medical examination, so long as the insurer would have issued the coverage on the basis of the facts revealed on the application, medical examination, and other usual sources of underwriting information. A life and health insurance policy without a conditional binding receipt is not effective until it is delivered to the insured and the premium is paid.

So long as the insured is going to receive the policy anyway, the insurer is obliged to cover a claim should one occur between the time the application is received and the time the policy is officially in place. If, however, the insured is denied coverage as the typical underwriting process progresses, the insurer could nullify the conditional binding receipt, even if a premium was collected.

The function of a conditional binding receipt can actually be divided into two separate receipts: a conditional receipt and a binding receipt.

Conditional Receipts

The conditional receipt is most common. Under a conditional receipt, the applicant and the insurance company form a "conditional" contract that is contingent upon the conditions that existed when an application or medication exam is completed. It provides that the applicant is covered immediately as long as they pass the insurer's underwriting requirements. It is the insurance agent's responsibility to tell the applicant they are covered on the condition they prove to be insurable and pass a medical exam if one is required.

A conditional receipt gives an insurance company a window of time in which they can ultimately issue or refuse to approve the policy. If during this time, the applicant for a life insurance contract dies, the company will pay a death benefit if the policy would have been issued.

Binding Receipts

A binding receipt states an insurance policy is effective upon receipt of initial premium payment. However, should the insured die before the application is processed, benefits are fully payable, subject to limitations.

The binding receipt binds an insurer to the agreement unconditionally when benefits are due up to the limits of the policy.

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What are the two types of conditional receipts?

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What is conditional premium receipt?