In most cases, when your application is taken, you will pay the initial premium payment with the application and receive the conditional receipt, if applicable.
It binds your life insurance coverage effective on the date of your application (the exact conditions vary a bit from company to company), provided that you are eligible for the coverage applied for.
For example, you apply a $1 million face amount life insurance policy, you are in excellent health on the date you applied for the coverage, and you received a conditional receipt. Then suppose you are run over by a truck the next day in an unfortunate accident.
What happens to your life insurance policy?
Even though the insurance company has not even received your application, your beneficiary will receive the $1 million, once the company underwrites the case and determines that you were eligible for the coverage.
In this example, you paid just one premium payment and your beneficiaries collected the entire proceeds.
Now suppose you have a serious heart condition, of which you are unaware. Otherwise, your situation is identical to that described above.
You apply for the coverage, get your conditional receipt, and take a medical examination the next day. On the way home, the truck runs you over and you are killed.
Since you are not eligible for the applied for coverage, the company underwrites the case, discovers your heart condition, declines the claim and returns the premium payment to your beneficiary.
That’s how a conditional receipt works.
It is, in effect, a limited life insurance agreement; good until the company can underwrite the case and make a final determination of your eligibility for the applied for coverage.
Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit https://tonysteuer.com/ to join the GET READY! Financial Preparedness Club and access free resources.