Life Policy Legally Enforceable

Life insurance policies are legally enforceable contracts and are subject to the general rules of contract law. If you as the policy owner pay the premiums that are required, then, in the event of the death of the insured, the insurance company will pay the stated death benefit.

Actually, the premiums for a whole life policy that are required to be paid each year, invested at the company’s earning rate, over the life expectancy of the insured should equal the death benefit that will ultimately be payable.

Term insurance is different, since the death benefit is payable only for the period of time specified in the policy. As a result, a term premium is based on the probability of death occurring during that period of coverage.

Since the death benefit is so much larger than the premium paid each year, life insurance contracts are aleatory agreements, since both parties realize that, depending on unforeseen circumstances, the policy owner may receive a value out of proportion to the value that is given up, especially in the early years of a policy’s existence. In 18th-century England, this characteristic led persons to purchase life insurance on the life of anyone who was in the public eye.

Individuals who had been accused of crimes that were punishable by death or those who were out of favor in the royal court were favorite subjects for life insurance policies. The situation worsened to the extent that newspapers carried premium quotes on persons who were known to the subject of speculative insurance.

In 1774, Parliament put a halt to what, in effect, had become wagering, by enacted legislation that required a person purchasing insurance on the life of another to have what is known as an insurable interest in the life of the person to be insured. This means that there must be an existing relationship between the person who will own the policy and the person whose life is to be insured such that that continued existence of the insured is to the economic advantage of the policy owner. In other words, the policy owner benefits more by the insured living to a ripe old age than the death benefit provided at the death of the insured. As a result, if an insurable interest is not present, the life insurance policy would be wagering contract and, thus, illegal.

Finally, life insurance contracts are unilateral in nature, since only the insurance company makes an enforceable promise to pay a death benefit in exchange for the performance by the policy owner of only one action – paying the required future premiums. As soon as the policy is issued by the insurance company and the first premium is paid, the contract goes into effect.

Another interesting characteristic of a life insurance policy is the suicide clause. In order to protect themselves from persons who might buy insurance on themselves with the intention of committing suicide, life insurance companies took the precaution of inserting a clause that is now found it virtually every life insurance policy sold in the United States. This suicide clause states that, in the event that the insured commits suicide within two years of the policy’s issue date, the death benefit that is payable is limited to a return of premiums plus interest.

The legality of such a policy provision was upheld by a Supreme Court ruling. Also, as a further safeguard for life insurers, policies now state that the suicide provision applies whether the insured was sane or insane.