What Is the Importance of Aleatory in Insurance Contracts?
An insurance policy is a legal contract between you and your insurance company and contains a number of important features. An insurance contract requires you to pay a premium in exchange for the company's promise to pay a claim should the need arise. A key characteristic of the policy is that it is an aleatory contract, which may or may not work in your favor.
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Identification
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An aleatory contract is one in which the amount of money paid and benefits received by the parties may not be equal. An insurance policy is an example of an aleatory contract, because the amount of money paid in benefits by the company may be far greater than what the policyholder pays in premiums. On the other hand, if the policyholder keeps the coverage for many years and files a minimal number of claims, the insurance company could come out ahead.
Risk Assessment
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The aleatory nature of an insurance contract is an important consideration when the company evaluates a new applicant. The company does not want to put itself in a position where a rapidly occurring claim results in an unprofitable risk. For instance, if a policyholder takes out a $100,000 life insurance policy and dies one month after the policy was issued, the company may have only received a few hundred dollars in premium in return for the claim payout. To avoid this, the company carefully reviews the applications to ensure there are no health or lifestyle factors that may result in a premature death.
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Policyholder Viewpoint
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From the policyholder's perspective, it is important to accurately gauge how much insurance he may need and find the lowest premium possible, because he could pay money for insurance coverage he rarely uses. Tools such as a life insurance needs calculator can help an individual assess his need for life insurance by closely examining his current financial situation. He also can use websites such as esurance and eHealthInsurance to obtain quotes from several insurance carriers at once.
Considerations
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Some types of life insurance can help a policyholder offset the possible negative effects of the aleatory contract. A return of premium term life policy includes a provision in which the policyholder receives some or all of the premium paid if she survives until the end of the term, although the premiums may be a bit higher than for a regular term policy. A variable life policy contains an investment element in which cash accumulates based on the performance of investment vehicles such as mutual funds. If the investments perform well over time, the return could offset some or all of the premium expense.
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