The Parties to a Life Insurance Contract

A life insurance policy is a legally enforceable contract issued by the insurer in consideration of the application and the payment of premiums. The essence of that contract is that:

If the insured dies while this policy is in force, we will pay the Sum Insured to the Beneficiary, when we receive at our Home Office due proof of the Insured’s death, subject to the provisions of this policy. 

There are four parties to the life insurance contract:

1. the insurer;

2. the insured;

3. the applicant-policyowner; and

4. the beneficiary.

The insurer is the first party to a life insurance contract. The insurer almost always operates in corporate form and must be licensed in each state in which it does business. The insured is the second party to the contract.2 Almost any natural person can be an insured.

The applicant-policyowner is the third party, and is often (but not always) the same as the insured. This is the party who applies for and owns the contract that has been made with the insurer. Again, generally, almost any natural person and most entities such as trusts, corporations, partnerships, limited liability companies, or sole proprietorships can apply for and own life insurance on one or more person’s lives.

Some state laws give those with “limited contractual capacity” (e.g., a minor) a statutory right to enter into a contract of life insurance and then to void that contract and regain the premiums paid.

The beneficiary is the fourth (or third, if the insured and the policyowner are the same) party to the contract. Although the beneficiary does not sign the application for insurance and may not even be aware of the existence of the insurance, because the contract is for that party’s direct benefit, that party can sue the insurer after the insured’s death to collect the policy proceeds. So in a very real sense, at the instant the policy matures through the insured’s death, a life insurance policy is a contract for the benefit of the third party beneficiary.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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