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Difficulty: MediumDistinctive Characteristics of Insurance Contracts

A software development firm secures a key person life insurance policy on its lead developer. Five years later, the developer unexpectedly passes away. The insurance company pays a 2,000,000deathbenefittothefirm,eventhoughthetotalpremiumspaidbythefirmoverthefiveyearsamountedtoonly2,000,000 death benefit to the firm, even though the total premiums paid by the firm over the five years amounted to only 30,000. Additionally, during the life of the policy, the firm was never legally obligated to continue paying premiums, but the insurer was legally compelled to pay the death benefit once the death occurred.

Which of the following distinctive characteristics of an insurance contract are explicitly demonstrated by this specific scenario? (Select two that apply)

  1. Aleatory contractAnswer
  2. Unilateral contractAnswer
  3. C
    Contract of adhesion
  4. D
    Exchange of absolute warranties

Answer

The scenario demonstrates that the contract is both aleatory and unilateral.
The correct options are aleatory and unilateral because the scenario explicitly details an unequal exchange of monetary value (a hallmark of an aleatory contract) and explicitly notes that only the insurance company is legally bound to perform under the contract (the definition of a unilateral contract).

Step-by-Step Solution

1
Analyze the financial transaction described in the scenario.
The firm paid 30,000inpremiums,whiletheinsurerpaida30,000 in premiums, while the insurer paid a 2,000,000 benefit.
Identifying an unequal exchange of value points directly to the 'aleatory' characteristic of insurance contracts, where outcome depends on an uncertain future event.
2
Examine the legal obligations of both parties as outlined.
The firm had no legal obligation to pay premiums, but the insurer was legally bound to pay the death benefit.
Recognizing that only one party makes a legally enforceable promise defines the 'unilateral' nature of insurance contracts.

Key Concept

Distinctive Characteristics of Insurance Contracts: Aleatory (unequal value) and Unilateral (one-sided promise)
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Distinctive Characteristics of Insurance Contracts

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