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Life Insurance Conditional Binding Receipts*
I.
INTRODUCTION
When someone applies for a life insurance policy, the most common scenario is for the applicant to sign the application and pay the first premium. In return he1 is given a conditional binding receipt. In many cases, the necessary medical information about the applicant is obtained by the insurance agent at the time of application and is made an additional part of the application papers. In other cases, the applicant is required to submit to a physical examination by a physician approved by the insurer. A typical conditional receipt will state:
The insurance under the policy for which application is made shall be effective on the date of this receipt or the date of completion of the medical examination (if and when required by the Company), whichever is the later date, if in the opinion of the authorized Officers of the Company . . . the Proposed Insured is insurable and acceptable for insurance under the rules and practices on the plan of insurance .... If the Proposed Insured is not so insurable and acceptable the Company has no liability under this receipt....
[The] Company shall have 60 days from the date of application to consider and act upon the application ..2
II.
EFFECT OF BINDING RECEIPT
Insurers are willing to provide temporary coverage for most applicants because in return they gain the advantage of the applicant's psychological commitment to go through with the purchase. If no premium is to be paid until the application is approved and the policy issued, some applicants may change their minds and decide not to accept and pay for the policy. This means, of course, that the insurer will have incurred considerable unrecoverable expense, and will also have lost the potential profit from providing insurance coverage in the years ahead. On the other hand, when the premium is paid at the time of the application, most applicants believe that they have made a final decision. They will accept the policy when issued.
Under the usual terms of the conditional binding receipt, most insureds will have immediate coverage if they die at any time thereafter. Also, their insurability will not be affected by any subsequent changes in their health or other facts...