One of the very first things I was taught as I was being trained to sell life insurance in 1960—my god where has the time gone?—was that life insurance is a unilateral contract. I was told that this meant the policy owner held all the cards—a pretty powerful thought!
Now, I don’t know if “unilateral contract” is a correct legal term, but the concept is correct. The only party obligated to perform under the life insurance contract is the insurance company, not the policy owner. That’s powerful! Think about it: a policy owner is not obligated to do anything once the policy (contract) has been issued. Is the policy owner obligated to pay the premium? No! Of course, if the premium is not paid, then the insurance company is off the hook. But even that isn’t necessarily so. If the policy is other than term, the insurance company will likely have some ongoing obligation (I’ll cover those obligations in my next entry).
As a policy owner, you have no obligation to continue paying premiums, but as long as you do, the insurance company must provide you with the benefits guaranteed by contract. They must pay the death benefit. The only way they can get out of that obligation is if the insured commits suicide within the first two policy years or if they successfully contest the policy within its first two years because of misrepresentation made on the application. Even in these instances the insurance company must return any premium paid during the two year period.
With car insurance, the premium can be increased (usually every twelve months) if the driver has had excessive moving violations or claims since the original application was submitted. Renewal of the policy may even be denied. With a life insurance contract, the insurance company cannot decide to increase a premium or deny renewal because the insured has suffered a heart attack after the policy is issued. The only exception would be during the first two policy years due to misrepresentation, in which case the policy could be rescinded.
The unilateral nature of the life insurance policy puts the policy owner in the catbird seat…possibly even if premiums have been discontinued.
Next, I’ll discuss the benefits of permanent polices even after premiums have been discontinued and how to manage a policy when the insured becomes terminally ill.