The Life Insurance Policy

The life insurance policy is a unilateral contract in which the company agrees to pay the insured's beneficiary a stipulated amount of money upon the death of the insured. The life company is required by law to perform this obligation provided the policy premium has been paid fully and in the prescribed timely manner.

A life policy is issued after the insurance company has received an acceptance to its offer from the proposed insured. The application contains a number of personal questions to help confirm the applicant's legitimacy in requesting coverage. This validation can include both medical and moral considerations.

Most states allow the insured no less than 10 days from delivery date to return a policy for a complete refund of premium. Of course, the insured can always cancel the policy beyond this grace period by simply refusing to pay the next premium. This is the unilateral nature of the contract.

Most states permit the life insurance company to void a policy if it can prove material misrepresentation within two years of the issue date. The test of materiality generally means the company would not have issued the policy to begin with had it been aware of information that affects its ability to underwrite within the science of large numbers.

You see, the life company can't predict your specific date of death, but it can predict with great accuracy the probability of your death as it relates to thousands of others who fit your profile. If someone intentionally falsifies information relative to this predictability, the principle upon which insurance is founded would be jeopardized and unable to function.

A life policy is considered property and, therefore, part of the owner's estate. If the amount of death benefit - when added to other assets - inflates the probability of paying an estate tax, then ownership is sometimes changed to a party or trust outside of the insured's personal estate.

If a policy contains cash value, consideration should be given to the potential gift tax consequence of an ownership change.

In the most typical situation, a person applies for a policy on his or her own life and designates the wife or husband as primary beneficiary. Making the correct beneficiary designation is extremely important because without it the death proceeds might be subject to income tax.

A life policy comes in a variety of flavors - which are actually hybrids of term and permanent life insurance.  The best long term, lowest net cost value with an increasing death benefit is found in whole life.