Life Insurance: Policy Contracts

The contract of life insurance is expressed in a document known as a policy. The life insurance policy is distinguished from most other types of contract by the following peculiarities. First, it is a unilateral contract. That is, the insured may cancel the contract at any time, and under certain conditions may even recover a portion of what he has paid under its terms, while the insurance company has no such option, but is bound by the contract so long as the insured fulfils his obligations.

Second, although the contract is an agreement between two parties, the insurer and, the insured, there is usually involved a third party, known as the beneficiary, to whom the insurance is payable in the event of the death of the insured within the life of the contract. Though not a party to the contract, the beneficiary may have title to the policy. Whether this is the case depends on the form of the contract. If the policy contains what is known as a "change of beneficiary clause," that is, a clause giving the insured the right to change the beneficiary at will, the title vests in the insured, and he may be required to assign it for the benefit of creditors in the event of his own insolvency. If there is no such clause, the beneficiary's consent is necessary for a change of beneficiary, and creditors have no claim to the surrender value of the policy. In either event, under the laws of most states, the proceeds of a policy payable to wife or children, if matured by death of the insured, are not liable for the debts of the insured, even though he was insolvent at death. Nor can such funds, as a rule, be seized by creditors of a widow or minor children, so long as they are not mingled with other funds which are subject to such seizure.A third peculiarity of the life insurance policy contract is the high degree of standardization which it displays. The details differ widely from one company to another, but the most important features of the contracts written by one company are almost identical with those written by another, so that it is possible to classify and describe them almost without reference to the peculiarities of practice of different companies. The standard types of policy may be classified on any one of several bases, as is indicated in the following outline:

CLASSIFICATION OF LIFE INSURANCE AND ENDOWMENT POLICIES

I. According to conditions of maturity

1. Term insurance

2. Whole life insurance

3. Endowment life insurance

4. Pure endowments

5. Life annuities

6. Life insurance with disability provisions

II. According to method of payment of premiums

1. Single premium

2. Limited payment life

3. Level premium

4. Natural premium

III. According to number of insured persons

1. Individual

2. Joint life

3. Group

IV. According to type of insurer

1. "Old line" or legal reserve policies

2. Fraternal benefit certificates

3. Assessment agreements

4. Government (war risk) policies

5. Miscellancous agreements of insurance

V. Accordirig to the right of the insured to share in profits of the insurer

1. Participiting

2. Non-participating

Let us consider first the classification according to conditions of maturity.

A term insurance policy is a pure insurance contract. It provides insurance for a stipulated term of years, for a premium which may be paid either in advance or in a series of annual, semiannual, or quarterly payments. In case of lapse, there is, as a rule, no refund to the insured, and in case of expiry before the death of the insured the obligation of the insurer ceases. Renewable term policies have the additional feature that the insured is entitled at the expiration of the policy to take out another contract without medical examination at the rate which he would be charged at his attained age if he were accepted as a new applicant. Convertible term policies provide that the insured may at any time during the life of the contract, or at its expiration, exchange his policy for one of the other standard types of insurance contract, either paying the premium, which would be due if he were taking out a new contract at the time of conversion, or else taking the rate which would have been appropriate to his age at the time of the original application, and paying the back premiums with interest.

Whole life policies provide that the insurance shall extend throughout the life of the insured. As is the case with term insurance, various options as to manner of payment of premiums are offered. The whole life policy with level annual premium is the most popular of the standard types of policy.

Endowment life policies provide insurance for a stipulated term of years, most often twenty, with the provision that in case the insured survives the term of the contract the insurance is due at once. The pure endowment, a rare contract in its simple form, provides for the payment of a stipulated sum only in case the beneficiary survives a definite period. Life annuities provide an income of a stipulated amount throughout the life of the beneficiary. The life annuity is really a series of pure endowments for successive periods. Disability clauses in life insurance policies provide that the total and permanent disability of the insured shall operate either to terminate liability for further payment of premiums, or to mature the policy, or otherwise modify the terms of the contract.

Classifications