Quick Answer
A valid insurance contract needs offer and acceptance, consideration, competent parties, and a legal purpose. Insurable interest is a legitimate interest in the covered person or property. An individual has it in their own life; coverage on someone else generally requires a family or financial relationship. Exact requirements and timing depend on the coverage and governing law.
How Do Contract Elements Differ From Contract Features?
- Offer and acceptance describe agreement to proposed terms.
- Consideration is the value exchanged. The applicant pays premiums, the amounts paid for coverage, and makes required statements; the insurer promises covered benefits.
- Formation elements establish a valid agreement. Contract features describe how that agreement works.
| Feature | Meaning |
|---|---|
| Conditional | Duties and benefits depend on stated conditions, such as premium payment and proof of a covered loss. |
| Unilateral | The insurer makes the enforceable promise to pay under the contract. |
| Adhesion | The insurer drafts standard policy language for the applicant to accept or reject. |
| Aleatory | The value exchanged can be unequal. A covered loss can produce a benefit greater than premiums paid; without a covered loss, no claim payment may be due. |
Competent parties and lawful purpose
- Competent parties means the parties have the legal ability to enter the agreement. This is also called legal capacity.
- Legal capacity is different from physical health, income, or the ability to afford a premium. A favorable medical underwriting result does not establish legal authority to sign.
- When someone acts for a proposed owner, check the applicable authority document and its scope. Being the insured, beneficiary, or a relative does not by itself establish authority to act for the owner.
- A court order affecting financial authority raises a capacity or representation question. Follow the applicable requirements before relying on a signature.
- Legal purpose means the agreement has a lawful objective. Insurance should protect a legitimate interest rather than create an unlawful wager on someone’s death.
- Check each formation element separately. Paying a premium does not cure missing legal capacity. Agreement to terms or careful drafting does not make an unlawful objective lawful.
- The reverse also matters: a lawful goal, such as protecting dependents, does not establish that every other formation requirement has been met.
Exam Tip: Gotchas
- Ask whether the problem concerns the person’s legal ability, the agreement’s objective, the parties’ assent, or the value exchanged. Evidence for one element may not prove the others.
How Does Insurable Interest Apply to a Key Employee?
- The policyowner holds the policy's control rights, subject to its terms and other rights.
- The insured is the person whose life or health is covered.
- The beneficiary is the person or entity designated to receive the applicable proceeds.
A company applies for coverage on a key employee because the employee’s death could cause a documented financial loss. An unrelated person seeking to profit from the same death has no comparable legitimate interest.
What Does a Signed Application Establish?
- A completed, signed application records the applicant's request for coverage and required statements.
- Separate contract formation from insurable interest.
- A signed application does not alone establish acceptance, policy delivery, or the effective date; the contract and applicable rules determine those questions.
Exam Tip: Gotchas
- The policyowner and beneficiary can be different people. Insurable interest is about a legitimate relationship to the risk, not that every named party must be the same person.
Contract features and insurable interest
- Insurance contracts combine ordinary contract elements with features that affect interpretation.
- Insurable interest limits insurance to a legitimate relationship to the risk rather than a wager on another person’s loss.
- For life insurance, the relevant time and required relationship are governed by applicable law and product facts.
- The policyowner and beneficiary need not be the same person, but naming a beneficiary does not create insurable interest by itself.
- A person has an insurable interest in their own life and may name a beneficiary, such as a family member or charity, subject to applicable rules.
- When someone procures new coverage on another person, look for the required legitimate relationship. A documented debt or a business loss tied to the insured’s death can support a financial interest.
- A loan agreement can establish an existing creditor-debtor relationship. A beneficiary form, consent to be insured, or proof that the applicant can afford premiums does not by itself prove that relationship.
- Evaluate insurable interest when new life coverage is arranged. Do not treat the later transfer of an existing, valid policy as automatically identical to procuring a new policy without the required interest.
Exam Tip: Gotchas
- A beneficiary designation does not by itself create insurable interest.
What Should You Check on Exam Day?
- What is exchanged in an aleatory contract, and why may the amounts differ?
- Which four basic elements form a contract?
- What problem does insurable interest prevent?