Tennessee Life Producer Practice Exam

Which characteristic defines life and health insurance policies?

1. Mutual contracts where both parties make promises

2. Unilateral contracts where one party promises and the other can only accept by performance

3. Bilateral contracts that involve mutual obligations

4. Written contracts that require notarization

The correct answer is: Unilateral contracts where one party promises and the other can only accept by performance

Life and health insurance policies are defined as unilateral contracts because they involve a promise made by one party, typically the insurer. In this type of contract, the insurer agrees to provide a specific benefit, such as a death benefit or coverage for health-related expenses, as long as the insured pays the premium. The insured cannot actively promise anything back to the insurer; their acceptance of the contract is implied through their actions, such as paying premiums or being subject to the terms of the policy. The essence of a unilateral contract is that there is an obligation created only for one party—the insurer. The insured does not have to provide any consideration in the form of counter-promises to make the contract valid. Instead, the insurer is bound to fulfill its promise when the conditions of the policy are met, such as in the case of a covered claim. This unique characteristic sets life and health insurance apart from other types of agreements where both parties have mutual obligations. Understanding this concept is crucial for insurance producers, as it affects the way agreements are structured and the obligations of the insurer in regulating claims and maintaining coverage.