Rhode Island Life Insurance Practice Exam

Which of the following requires an offer, acceptance, and consideration?

1. Policy renewal

2. Insurance appraisal

3. Contract

4. Beneficiary designation

The correct answer is: Contract

A contract is a legally binding agreement between parties that necessitates three essential components: an offer, acceptance of that offer, and consideration. The offer is a proposal made by one party to another to enter into an agreement. Acceptance occurs when the second party agrees to the terms set forth in the offer. Consideration refers to something of value that is exchanged between the parties, which can be in the form of money, services, or promises. In the context of insurance, these elements ensure that both the insurer and the insured have mutual obligations and responsibilities, thereby establishing a clear framework for the agreement. For example, when purchasing a life insurance policy, the insurer offers coverage, the policyholder accepts the terms, and the premium paid serves as the consideration. In contrast, policy renewal does not typically involve a new offer and acceptance as it may simply be a continuation of an existing contract. An insurance appraisal is a process to estimate value or risk, rather than a binding agreement. Beneficiary designation involves the policyholder deciding who receives benefits upon their death and does not constitute an independent contract requiring the three elements mentioned. Therefore, the essence of a contract encompasses the need for an offer, acceptance, and consideration, making it the correct answer.