A binding receipt is a document issued by a life insurance company that provides temporary coverage to an applicant while their application for permanent life insurance is being processed. This coverage is effective from the date of the application or the date of the medical exam, if required, whichever is later, and remains in force until the policy is either issued or declined.
History of Binding Receipt
The concept of a binding receipt dates back to the early days of the life insurance industry, when policies were sold primarily through agents who worked on commission. In those days, it was not uncommon for agents to collect premiums from applicants before submitting their applications to the company. In order to provide some protection to the applicant in case the policy was not issued, companies began issuing binding receipts.
How Binding Receipt Works
When an applicant submits an application for life insurance, the company may require a medical exam or other underwriting information before issuing a policy. During this time, the applicant is not covered under the policy. However, if the applicant pays the first premium and is issued a binding receipt, they will be covered for a certain period of time while the underwriting process takes place. If the policy is ultimately issued, the coverage provided by the binding receipt will be replaced by the coverage provided by the policy.
If the applicant is declined coverage, the binding receipt will expire and no coverage will be provided. If the applicant dies during the period of temporary coverage, the death benefit will be paid out to the beneficiary named in the application.
Benefits of Binding Receipt
Binding receipts are beneficial for both the applicant and the insurance company. For the applicant, a binding receipt provides peace of mind that they are covered during the underwriting process, which can take several weeks or even months. For the insurance company, a binding receipt encourages applicants to pay their first premium and submit their applications promptly, which can speed up the underwriting process.
In summary, a binding receipt is a temporary coverage provided by a life insurance company to an applicant while their application for permanent life insurance is being processed. It provides coverage from the date of application or medical exam until the policy is either issued or declined. Binding receipts are beneficial for both the applicant and the insurance company as they provide peace of mind and encourage timely submission of applications.