West Virginia State Life Insurance Practice Exam

What insurance contract feature does a situation where Q pays $900 in premiums for a $500,000 payout illustrate?

1. Aleatory

2. Unilateral

3. Bilateral

4. Conditional

The correct answer is: Aleatory

This situation illustrates the concept of an aleatory contract. In the context of insurance, an aleatory contract is one where the parties involved have unequal obligations or benefits. The insurer is obligated to pay a specified benefit (in this case, $500,000) under certain conditions, while the policyholder has paid a relatively small amount in premiums, $900. The relationship between the premium payment and the potential payout demonstrates the aleatory nature of insurance agreements, as the amount paid in premiums is substantially less than the potential benefit received, reflecting the inherent risk factor in insurance. The unpredictable nature of losses compared to the premiums paid reinforces the aleatory aspect—an insurance contract is triggered by events that might happen (like a claim) which create a significant difference in the value exchanged compared to what was originally put into the contract. Bilateral contracts involve a mutual exchange of promises between the parties, which is not the primary focus in this scenario. A unilateral contract would imply that only one party (the insurer) is making a promise, but both parties have obligations defined in this context. Conditional contracts depend on certain conditions being met for the benefits to be paid, which does play a role in insurance but does not highlight the significant disparity in value as clearly