Tennessee Insurance Practice Exam

On Q's life insurance policy, Q pays $900 in premiums for a $500,000 benefit. What feature of the contract does this illustrate?

1. Unilateral contract

2. Fortuitous event

3. Aleatory

4. Conditional contract

The correct answer is: Aleatory

The correct answer highlights the nature of the life insurance contract as an aleatory contract. This type of contract is characterized by the fact that the outcomes for the parties involved are based on uncertain events. In life insurance, the premium payments made by the policyholder do not equate to the benefit the insurer stands to pay out, which is based on the occurrence of the insured event – in this case, the death of the insured. In this scenario, Q pays $900 in premiums for a potential benefit of $500,000, which means that the insurer essentially commits to paying out a much larger amount than what the policyholder pays in premiums, contingent upon a specific event happening (the insured's death). The randomness and uncertainty inherent in life insurance contracts exemplify the aleatory nature, where one party may benefit much more than the other based on uncertain future events. Understanding that the insured event (death or other insured occurrence) may or may not happen during the term of the policy reinforces the concept of an aleatory contract, highlighting the imbalance of consideration between the two parties involved.