An underwriter receives an application for a key person life insurance policy. The corporate applicant has completed the application, signed the statements detailing the proposed insured's medical history, and included a check for the initial annual premium. For this policy to form a valid legal contract, mutual consideration must exist. Which of the following best describes how the element of consideration is fulfilled in this transaction?
- AThe consideration is strictly the financial exchange of the applicant's premium check for the physical delivery of the policy document by the insurer.
- BThe applicant provides consideration by warranting that all medical history statements are absolutely true, which the insurer exchanges for policy issuance.
- CConsideration is finalized by the agent exercising express authority to accept the premium and immediately bind the corporation's coverage.
- The applicant provides the premium payment and the representations made in the application, and the insurer provides the promise to pay the specified death benefit if a covered loss occurs.Answer
Answer
The applicant provides the premium payment and the representations made in the application, and the insurer provides the promise to pay the specified death benefit if a covered loss occurs.
In an insurance contract, consideration refers to the mutual exchange of value. The applicant's consideration consists of the payment of the premium along with the truthful statements (representations) made on the application. The insurer's consideration is the legally binding promise to indemnify or pay a specified death benefit upon the occurrence of a covered loss.
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Key Concept
Consideration in Insurance Contracts