Did You Know: Life Insurance Policies are Contracts?
Most people don’t bother to read their life insurance policies. If you don’t know what’s in your policy, review it with an estate planning attorney so you’ll know what you have purchased.
Most people just sign on the dotted line, and don’t know that their life insurance policies are actually legally enforceable contracts. A recent article in The Aiken Standard, “Life insurance policy is a contract,” explains that as long as you pay the premiums as required, then when the insured dies, the insurance company has contractually agreed to pay the death benefit.
When looking at term insurance, note that since the death benefit is payable only for the period of time specified in the policy, the term premium is based on the probability of death occurring during that period of coverage.
Since the death benefit is much bigger than the annual premium, life insurance contracts are aleatory (based on chance): both parties realize that, depending on unforeseen circumstances, the policy owner may receive a value that’s out of proportion to the value that is given up, especially in the early years of a policy.
Life insurance contracts are also unilateral because only the insurer makes an enforceable promise to pay a death benefit in exchange for the performance by the policy owner of just one action, which is paying the premiums. When the policy is issued by the insurance company and the first premium is paid, the contract is in effect.
One more interesting part of a life insurance policy is the suicide clause. This clause is designed to protect the insurance company from those who might buy insurance on themselves with the intention of committing suicide. Life insurance companies have added language into most all life insurance policies sold in the U.S. which states that if the insured commits suicide within two years of the policy’s issue date, the payable death benefit is limited to a return of the premiums plus interest.
This provision has been upheld by a Supreme Court ruling, and in order to further protect the interests of life insurance companies, policies also include a provision that states that this suicide provision stands regardless of the mental health status of the insured.
Your estate planning attorney will be able to review life insurance policies with you to ensure that they are in alignment with your estate plan.
Reference: Aiken (SC) Standard (March 18, 2017) “Life insurance policy is a contract.”