Within the small print on nearly every insurance policy, there is generally found some highly technical legal provisions and contractual terms. These terms are intended to cover just about every possible scenario – and, policies are usually being updated and revised continuously in order to keep up with both coverage and industry changes.
Components of the Insurance Contract
While many people may be familiar with life insurance policy premiums and benefits, it is also important to understand that insurance policies are considered to be legal contracts between the insurer and the insured. Such contracts will determine the claims in which the insurer is legally required to pay in exchange for a premium payment from the policy owner.
As life insurance plans are considered to be legal contracts, the terms that are found within these contracts will essentially outline the limitations of the particular events that are insured. With this in mind, policies will also typically include specific conditions under which coverage is specifically excluded. Some examples here can include claims that are related to fraud, suicide (typically excluded for two years after policy issuance), and acts of war.
How Life Insurance Differs From Other Types of Legal Contracts
Insurance contracts are designed to meet specific needs. Therefore, these contracts contain a number of features that may not be found in many other types of legal contracts. All insurance contracts, however, will essentially contain the same principles and processes. Such policies will usually assume the risk of an event that may or may not occur, and they will likewise pay the cost of a claim if such events do occur.
Therefore, based on insurance code, a valid insurance contract is required to have the following specifications:
- The parties between whom the contract is being created
- The property, asset, or life that is being insured
- The interest of the insured in the property, asset, or life that is being insured – provided that he or she is not the absolute owner
- The risks that are being insured against
- The period during which the insurance is being continued
- Either a) A statement of the insurance premium that is due, or b) A statement of the basis and the rates upon which the final premium will be determined and paid, provided that the insurance is the type where the exact premium can only be determined upon the termination of the contract
Other Life Insurance Contract Considerations
As with other types of legal contracts, the parties that are involved in an insurance policy must be legally competent in order to enter into this type of an agreement. As an example, a minor child or an individual who is not mentally competent would not be able to legally enter into a binding life insurance policy contract.
Likewise, a legal contract such as life insurance must also have some type of consideration. Consideration is the premium payment that is made by the insurance policy holder. This can also include future premiums that are due from the policy holder in return for the ongoing insurance coverage.
For an insurance company, consideration can also be the funds that are paid out to an insured or their beneficiary when an insurance claim is filed. Therefore, the consideration component that is required in an insurance contract essentially means that each party to the contract must provide some amount of value to the other. Given this, should a policy holder stop making premiums after the grace period has expired, benefits will not be paid out to the policy beneficiary as the policy will be considered to have lapsed.
The purpose of a life insurance contract must also be legal – and it should not go against public policy. This means that the insurance contract could become unenforceable due to the insured’s wrongful conduct.
For example, if the insurance policy’s beneficiary caused the insured’s death, a life insurance policy’s proceeds would not likely be available to him or her. If, however, the beneficiary accidentally killed the insured, for example, in a auto accident, the insurer would not likely forfeit the policy proceeds. Therefore, when considering the purchase of a life insurance policy, it is important to keep in mind that the policy will constitute a legal contract between the insurer and policy owner.