Initial Premiums and Receipts
MR. WATSON: We're going to go over some things that are extremely important right now. I want to talk about receipts, and there are two kinds:
Conditional Receipt****
MR. WATSON: Let's talk about the one you all will deal with. It's called a conditional receipt. Let's say March 1st you give me an application and money.
MR. WATSON: If you give me money, I must give you a conditional receipt. You are covered conditionally. What's the condition? If you die before we issue the policy, the condition is this: Would we have issued the policy had you lived, as applied for? And if the answer is yes, we will pay your beneficiary. If the answer is no, we won't pay the beneficiary and will return the premium.
MR. WATSON: We can't just say we would not have issued the policy because you died. We'd have to actually complete the underwriting process and look at whether or not we issued policies for other women your age, your background, medications, and base our decision on that. Similar risk classifications. Does that make sense?
STUDENTS: Um-hmm.
MR. WATSON: And if we issued those policies standard, as applied for, then you have coverage. Understand?
STUDENTS: Yes.
MR. WATSON: Standard, as applied for. Did you hear that?
STUDENTS: Yes.
MR. WATSON: Did you understand it?
STUDENTS: Yes.
MAN: No.
MR. WATSON: No? Okay. Let's say my girl "24", fills out an application and gives me money. I received her application March 1st. You agree? It's right in my briefcase, been there two weeks. She dies. Is she covered?
STUDENT: Yes.
MR. WATSON: Maybe. We are going to look at other 24-year-old women. Are you on medication?
WOMAN: Nope.
MR. WATSON: She's not on any medications. We will look at other 24-year-old women, her body build, her height, her weight, and no medications. If we find that we issued those others standard, as applied for, then we will pay her husband, her mom, her dad, whoever was the beneficiary. You agree? Everybody understand?
STUDENTS: Yes.
MR. WATSON: What if she was on high blood pressure medicine?
MR. WATSON: Are you on high blood pressure medicine?
WOMAN: Yes.
MR. WATSON: Different example. Yes, she's on high blood pressure medicine. She's got a heart that skips a beat. Not a big deal, just skips a beat. She's on a medicine that slows it down. Got a babbling heart. She dies. We determine that we would have issued the policy, but with a higher premium. We would have counter-offered, which is the company offering another policy at a different rate or with different terms. We talked about it in a previous chapter. We did issue those policies on those other young girls, her age. We would have charged her $100 more, because that's what we did with the other girls. We would have rated her. Understand? But she died just after giving me the application and the standard premium. What would we do?
MAN: Reduce the death benefit. (Wrong answer.)
WOMAN: Pay the difference of the premium she owed. (Wrong answer.)
MR. WATSON: Is that what we're going to do?
STUDENTS: Yes.
MR. WATSON: No. We're going to deny it. Oye!!!
WOMAN: Oh, because it has to be issued as she requested it.
MR. WATSON: That's my girl. As applied for. We don’t have offer and acceptance because the insurance company did not accept your application as applied for. You applied for a policy with a standard premium. Remember from Chapter 3, the "O" in CLOC stood for "offer and acceptance." When you give me an application and money, when you give me consideration, you are making an offer to buy. The company will either accept it, reject it, or counteroffer.
MR. WATSON: So would we have accepted it?
STUDENTS: No.
MR. WATSON: We would have counter offered, but she died before accepting the counter offer. Do you understand?
STUDENTS: Yes.
MR. WATSON: So we don’t have offer and acceptance, which means we don’t have a contract. We return the premium. Make sure you understand both examples. "As applied for" is the key.
STUDENT: One question. You say standard. But what if it's preferred?
MR. WATSON: Standard or preferred. Anything better than standard would be cool, because it's going to be a lower rate. But you always apply standard. We may give you a preferred rate.
STUDENT: What was the other story about putting the application in your briefcase and the girl was still covered?
MR. WATSON: The first story, she had no medical problems, and she died. Since she would have been issued the policy as applied for, we would have paid the benefit. The second story, she had a medical condition and died. In both cases she died while the application was still in my briefcase. You agree?
STUDENT: Yes.
MR. WATSON: The first story, she was in great health, everything was cool, everything was clean, and she had no problems. You remember?
STUDENT: Yes.
MR. WATSON: The second story, she was on some kind of medication, and when she died - the application still in my briefcase - when she died, we looked at everybody else her age, same conditions, and we charged them more money. The point is we did not accept her offer as applied for, but would have counter offered with a policy for a different amount. There has to be an offer and an acceptance. So what did she do? She died before -
STUDENTS: -- accepting.
MR. WATSON: -- accepting. She was not there to accept the counteroffer.
MR. WATSON: Now, what if a guy needed an exam died before the exam was completed? Is he covered?
WOMAN: No. His application isn't complete without the exam.
MR. WATSON: That's my girl. The application was not complete; therefore, he cannot be covered.
- If an exam is not needed, then you are conditionally covered when the application is given with money.
- If an exam is needed, then you are conditionally covered when the exam has been completed, assuming the premium was submitted.
Remember that second point especially. Let’s say a guy submits an application and a premium, and then gets the medical exam done. The effective date of the policy will be the date of the medical exam. We’ll talk more about that in a minute.
STUDENT: What I am hearing here is that $100,000 is pretty much the point of where you need to have the exam?
MR. WATSON: Nope. Just an example, each company is different. Once again, the amount of insurance doesn't have anything to do with what we are talking about. It's a number I made up. What is important is whether or not they need a medical exam and each insurance company has its own guidelines. It could be any number. Do you understand?
STUDENT: Okay, yes.
MR. WATSON: $100,000 is just a number I made up. Could be $50,000.
STUDENT: So every company would have their own limits?
MR. WATSON: Yes. For me, a male, age 49, it might be $25,000. For him, age 35, might be $50,000. Each company would be different. It doesn't matter. It's just if an exam is required. You will know. You will be writing the application on him, looking at the rate book, the company's underwriting guidelines-Yep, you need an exam or nope, you don't need an exam. If you need an exam you are not covered until the needle comes out of the rear-end. Whenever the exam is complete.
STUDENT: But, after the exam is completed, and from the blood work they find out he has HIV. They would deny it?
MR. WATSON: That's the deal. When the exam is completed, then the insurance company will use that information to ask themselves: Is he insurable? Would we have insured him? You got it? Everybody all right?
STUDENT: Yes.