What is “Conditional Receipt” in Life Insurance?

 

What is “Conditional Receipt” in Life Insurance?

Sleeplessness ensues as this provider considers all the ways in which the unthinkable could happen in the coming days. An immediate search for affordable life insurance commences on the first business day possible. Friends and family are asked for referrals to an experienced life insurance agent. An appointment is made to explore the best life insurance products. The application is completed on the same day, but the problem remains.

This individual is not yet insured against loss of his life. Until that life insurance policy is in force, the applicant remains uninsured unless he embraces the concept of conditional receipt. With the application, the first premium payment should be made to the agent on the same day. This action creates a legal obligation on the part of the insurance company.

 

Application Accuracy

 

Insurance agents will encourage the applicant to write a check for the first month of life insurance premium. This payment is a good faith statement that the policyholder has entered the underwriting process and is insurable. Every answer on the life insurance application provides invaluable information for the underwriter to assess the risk level.

 

·         Medical history – Basic questions about pre-existing conditions, age and weight must be answered to determine the potential of loss related to medical problems. Healthy applicants will fall into the standard life insurance classes based on important health indicators.

·         Risky activities – Occasional participation in risky activities, such as parasailing, skydiving and scuba diving, will not reclassify the life insurance application. The applicant must provide accurate information concerning the frequency and involvement level for these interests.

·         Mental health – Additional questions are asked about the treatment of mental health challenges, such as depression, drug and alcohol use. Underwriters want to know if the applicant presents a risk of suicide at the time of the application.

 

Initial Assessment

 

Using all of the information on the application, the future policyholder is given information concerning annual premium rates for a certain death benefit. The insurance agent will offer various options to allow the applicant to determine the affordable premium that aligns with the desired life insurance coverage.

 

·         Policy class – All life insurance policies that present a comparable amount of risk are placed into a policy class. Policyholders within the class will pay similar annual premiums. Insurance companies cannot charge one policyholder higher premiums. Insurance policy classes exist to compensate for the risk presented to the insurer.

·         Annual premium – Once the initial premium amount is set, the applicant will write a check for the first month’s premium. This check will be sent to the insurance company to enter the contract in good faith. “Conditional receipt” provides coverage to the applicant throughout the underwriting process.

·         Acceptable risk – Based on the application, the basic decisions are made to determine if the insurer accepts the risk presented by the applicant. From the surface, the insurance company believes that this applicant falls within the standard life insurance underwriting guidelines.

 

Unexpected Death

 

In the rare instance that the applicant dies, the life insurance company will continue the underwriting process. Conditional receipt provides life insurance coverage as long as the underwriter does not encounter any surprises during the verification process. Various outcomes are possible if the applicant dies before receiving the response from the insurance company.

 

·         Accurate initial assessment – Once the underwriting is complete, the claim is matched with the policy to determine if the policy was accurately assessed. With everything in order, the beneficiary will be paid the entire death benefit according to the terms in the policy documentation. One month of premium was paid, but the policy was considered “in force” because of the “conditional receipt” clause.

·         Unacceptable risk – Underwriters might discover significant health problems that were not reported on the application. In this instance, the application is denied, and the beneficiary receives a refund of the one month premium that was paid.

·         Death benefit denied – In other instances, a risk factor is discovered that would place the policy in a higher risk class. The premium paid when the application was completed would not cover the additional cost of insurance. The insurance company would underwritten the policy but in a different policy class. The beneficiary would receive a check equal to the amount of premium paid.

 

Accuracy Matters

 

The full benefit of the conditional receipt clause is realized when the applicant provides sufficient information on the life insurance policy application. Details about medical conditions and accuracy in every answer will work together to provide life insurance coverage during the underwriting process. Peace of mind is essential for anyone with dependents who would suffer significant financial hardship if life insurance proceeds were not available at the untimely passing of the life insurance applicant.

 

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