Rhode Island Life Insurance Practice Exam

What type of contracts are life and health insurance policies considered?

1. Bilateral contracts

2. Unilateral contracts

3. Conditional contracts

4. Indemnity contracts

The correct answer is: Unilateral contracts

Life and health insurance policies are classified as unilateral contracts primarily because the nature of the obligations involved differs between the insurer and the insured. In a unilateral contract, only one party, in this case, the insurer, is bound to fulfill its promise. The insurer agrees to pay a specified benefit upon the occurrence of a covered event, such as the death of the policyholder. The insured, on the other hand, is not legally obligated to continue paying premiums or to maintain the policy; they have the option to terminate the agreement at any time. The insurance company, however, must honor its promise to pay claims as long as the policy remains in force and premiums are paid up to date. This contractual dynamic is distinct from the other options. For example, bilateral contracts imply mutual obligations from both parties, which does not apply here since the insurer bears the primary responsibility. Conditional contracts require certain conditions to be met in order for obligations to be fulfilled; while life and health insurance policies do have conditions (such as paying premiums), the defining characteristic remains that they are unilateral in nature due to the one-sided commitment of the insurer to pay. Indemnity contracts are designed to reimburse the insured for loss rather than providing a specified benefit like a life policy does.