CARD T037
Consideration
The value each side gives or promises in exchange for the other side’s agreement. In insurance, the applicant supplies the premium and application statements; the insurer promises covered benefits.
How it works
Consideration is the exchange supporting the agreement. Exam questions commonly identify the applicant’s premium and application statements on one side and the insurer’s promise on the other. The insurer need not first pay a claim to supply consideration: its promise has value. [35] [2]
Rae submits an application and initial premium. The insurer accepts the risk and promises the stated covered benefits. The premium is not a refundable security deposit simply because no claim occurs.
Consideration means value exchanged, not careful thought about purchasing insurance.
CARD T038
Offer and Acceptance
The proposal of contract terms and agreement to those terms. An insurer offering different terms may make a counteroffer.
How it works
An application with the initial premium is commonly treated as the applicant’s offer. Acceptance must match the proposed terms. Issuing coverage at a higher premium or with a changed benefit may be a counteroffer that needs acceptance. A receipt can separately govern interim coverage; submitting an application alone does not settle every effective-date issue. [3] [2]
An applicant seeks $300,000 at a standard premium. The insurer offers $300,000 at a higher rated premium. The changed premium is a counteroffer rather than acceptance of the original price.
A policy issue date, delivery date, and coverage effective date are not necessarily identical.
CARD T039
Competent Parties
People or entities with legal capacity to enter a contract. For example, someone unable to understand the agreement because of mental incapacity may lack that capacity. Minors may have limited capacity, with exceptions depending on state law and the contract.
How it works
Legal capacity concerns whether a party can enter a binding agreement. A person unable to understand the transaction because of mental incapacity may lack capacity. Minority can limit capacity, but insurance statutes sometimes permit minors of specified ages to contract. A diagnosis, age alone, or an unfavorable underwriting result does not automatically answer every capacity question. [3] [2]
A person cannot understand what the agreement does when it is signed. That raises a capacity issue. A person with a well-controlled illness who understands the transaction may have capacity even if underwriting charges more.
Competence is a legal-capacity issue; insurability is an underwriting issue.
CARD T040
Legal Purpose
A contract’s objective must be lawful. An agreement to finance unlawful conduct would raise a legal-purpose problem.
How it works
A contract cannot obtain enforceability merely by mutual agreement if its objective is unlawful. In life insurance, insurable-interest rules help prevent wagering on a stranger’s death. Legal purpose is one formation element; it does not replace consideration, agreement, or capacity. [3] [11]
Two people sign an agreement to fund an illegal operation. Their signatures and exchanged money do not cure the unlawful objective.
A lawful goal alone is not enough: the other contract elements must also be satisfied.
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Practice questions
Select an answer, then check it to see why each option is right or wrong.
T037 · Consideration
0 of 3 answered
T038 · Offer and Acceptance
0 of 3 answered
T039 · Competent Parties
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T040 · Legal Purpose
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Sources & further reading
Original explanations and practice scenarios informed by the following regulatory, legal, and product resources. State examples are not presented as nationwide deadlines or requirements.