The Aiken Standard notes in its recent article, “Life insurance policy is a contract,” that the required premiums for a whole life policy—which are invested at the company’s earning rate over the life expectancy of the insured—should be equal to the death benefit that will be paid. If you as the policy owner pay the premiums that are required, then when the insured dies, the insurance company will pay the death benefit.
When looking at term insurance, note that since the death benefit is payable only for the period of time specified in the policy, the term premium is based on the probability of death occurring during that period of coverage.
Since the death benefit is much bigger than the annual premium, life insurance contracts are aleatory (based on chance): both parties realize that, depending on unforeseen circumstances, the policy owner may receive a value that’s out of proportion to the value that is given up, especially in the early years of a policy.
Life insurance contracts are also unilateral because only the insurer makes an enforceable promise to pay a death benefit in exchange for the performance by the policy owner of just one action, which is paying the premiums. When the policy is issued by the insurance company and the first premium is paid, the contract is in effect.
One more interesting part of a life insurance policy is the suicide clause. This clause is designed to protect the insurance company from those who might buy insurance on themselves with the intention of committing suicide. Life insurance companies have added language into most all life insurance policies sold in the U.S., which states that if the insured commits suicide within two years of the policy’s issue date, the payable death benefit is limited to a return of the premiums plus interest.
The Supreme Court upheld the suicide provision.
In addition, to add more protection for life insurance companies, policies now state that the suicide provision applies regardless of whether the insured was sane or insane.
Reference: Aiken (SC) Standard (March 18, 2017) “Life insurance policy is a contract”