Why are promissory notes rarely accepted for premium payments by insurers?

• A. Because courts have always ruled promissory notes are invalid for premiums.
• B. Because courts will treat unconditional acceptance as payment even if the policyowner later defaults.
• C. Because promissory notes are too risky for insurers to hold as assets.
• D. Because promissory notes are more expensive to process than cash.

Answer: (C)

Promissory notes are promises to pay in the future rather than cash today, and life insurers need premium payments that are immediate and reliable to fund ongoing obligations and reserves. Holding notes exposes the insurer to credit risk—the possibility that the maker won’t pay or will pay late—which can disrupt cash flow, affect lapse protection, and complicate financial reporting. Notes can be difficult to convert to cash quickly, may require costly collection efforts, and their value can be uncertain if the maker’s financial situation deteriorates. Because of these liquidity and credit risks, insurers prefer actual cash or electronic payments that are promptly credited to the policy. The other options aren’t the main reason: there isn’t a universal rule that notes are invalid for premiums, and while acceptance could raise questions about default, the central issue is the risk and unreliability of notes as assets.