5.5.4 The Conditional Receipt
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.
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.