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This is a question that comes up occasionally. Usually someone wants to bind new coverage because the price just went up on their old policy, or because they want something in force for business purposes or due to upcoming travel.

The old way of “binding” life insurance was a real rats nest of potential problems for the customer. It was done through what was called a conditional receipt. Big emphasis on the word “condition”. To say that the process was heavily tilted in favor of the company and that the potential for a claim not to be paid as expected was high were actually both understatements.

Probably the most egregious of conditions was that if the policy was not approved at the rate class applied for, the receipt was void and no death benefit was due. Given just how petty underwriting can be, the potential for legitimate claims going unpaid was actually very high. For instance, if a person applied for preferred plus rates with a company and he died during the application process the standard procedure back then was to finish underwriting the application. If the person happened to have a total cholesterol of 225 on his labs he would be approved at preferred, not preferred plus. Because he wasn’t approved at the rate class applied for due to the slight difference in his cholesterol reading, the contract would be voided and no death benefit would be paid.

Well, those days are gone and the instrument for binding insurance is now a temporary insurance application and agreement. This is a kinder gentler cousin to the conditional receipt. Each company has their own take on the language for the TIAA, and your agent should review the agreement or receipt carefully with you before you move forward with it.

Things to watch for start with how much insurance you are applying for and how much insurance the company will actually bind. With American General the maximum death benefit under the TIAA would be $500,000 while with Banner Life it would be $1,000,000. And just in case you were wondering, you can’t take out multiple applications with multiple TIAA’s. The total benefit applies to all insurance applied for, so if you had two applications, each for $1,000,000, pending under TIAA’s with American General and died during the application period the total paid to your beneficiary would be $500,000.

Most companies require that the examination be completed for the TIAA to be effective. Thinking back to the scenario I talked about with the cholesterol, I assumed that if the client died the labs could still be used to decline them, but an attorney from Met Life assured me that underwriting stops upon death and there are no attempts to disqualify someone. If they qualified for the TIAA, which does involve a few health questions, upon death they were approved (as long as the death wasn’t due to suicide).

It’s very important to understand that just because you paid a premium with a TIAA and that premium was based on the rate class you were quoted and believed you would qualify for, it doesn’t bind the company to provide coverage at that rate. If their underwriting of the policy leads them to a different conclusion, that is the new rate for the policy. Bound or not, if you don’t accept the new rate you don’t get a policy.

Bottom line. Having said that, the TIAA seems infinitely more fair than the old conditional receipt system and a prudent way to bind coverage. While I still advise caution against lapsing an old policy and putting all your coverage at risk in new underwriting, but if you are without coverage or needing additional coverage quickly as happens in business sometimes, definitely consider using temporary insurance.