Not sure if anyone else experienced this issue. I'll try to explain it, hopefully it makes sense...
When someone signs up for a hosting account indicating they will use their existing domain and update their nameservers, any system generated emails that are meant for the client stop working after the hosting plan is provisioned.
It appears WHMCS is trying to send the emails locally to the server configured in my Setup section. I think WHMCS assumes the nameservers have been switched already. If the client has not updated their DNS, they will never receive any emails from me, including the Hosting account welcome email. In my test scenario, I also purposely did not go through with the payment. This means the client will also not receive any payment reminders.
To test this out: Sign up for a new hosting account and indicate your existing domain is example.com (should be something you have access to like a test domain you own). When you do the checkout, use an email account associated with the domain. In our case, use john@example.com.
When the hosting account is provisioned, emails to john@example.com are not received by the client until the client switches their DNS to my nameservers.
To further test my theory, I created the same email address john@example.com in the client area of my new hosting account, using the Quick Create Email Account section. And then logged in to webmail using that account. The emails that are meant for the client will be received in this account, instead of the true email account associated with their current DNS setup.
Hopefully that makes sense. I believe it's a bug and have reported it, but wanted to see if anyone else noticed this issue.