The Making of a Life, Health and Disability Income Insurance Policy
UPDATED: December 13, 2019
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An insurance policy is a contract between the policy owner (this can be the insured or someone else) and an insurance company. And because it is a contract, it is governed by rules that apply to general contract law.
One of the principles of contract law is the concept of offer and acceptance. Each insurance contract requires an offer by one party and an acceptance of that offer by the other party.
The insurance application is the starting point. When you fill out and sign the insurance application for life, health or disability income insurance and you include the first premium with it, you are usually considered to be the party who is making the offer. As previously stated, an offer is the first step in forming a contract. The next step is the insurance company's acceptance of the deal.
Insurance companies act through their agents. An agent having proper authority to act on behalf of a life, health or disability income insurance company can only invite an offer of insurance. (The life, health and disability agent cannot make a binding insurance contract. This differs from some other types of insurance, such as property and casualty insurance. Often agents selling auto or homeowners insurance, acting on behalf of the insurance company they represent, are able to make binding contracts in the field.)
Check for premium included in application
When you attach a check to your application for health, life or disability income insurance, the insurance company may accept or decline your offer.
Nor surprisingly, this also depends on the application's wording. For example, the insurance company application, by its terms, may state that your offer is not accepted (even though you have included the check for the first premium) until the application is approved by the company's underwriters. In this situation, if you incur a claim before the underwriting is completed, the insurance company has every right to decline and return your premium.
Alternatively, the insurance company can unconditionally accept both your application and your premium. When they do this, they have formally accepted your offer and a legal contract of insurance is formed.
Or the insurance company may reject your offer and end negotiations.
Or the insurance company may reject your offer by making a counter-offer. A counter-offer is a new set of terms and conditions given in response to your original offer. The difference between the original offer and the counter-offer may be an increase in premium, for a health insurance policy the addition of a rider excluding coverage for treatment for certain health conditions, or for a disability income policy a change in the terms of coverage, such as offering to issue for a reduced monthly benefit from that for which you applied. If you do not accept the new terms, there is no contract of insurance.
Check not included in application
If you do not attach a premium check to your insurance application, you are inviting the insurance company to make an offer to you. The insurance company may end the negotiations or may make an offer of insurance. You accept when you receive delivery of the policy and pay the first premium.
Whether an offer or a counteroffer is made, the second component - acceptance - must occur by you as the prospective policyholder.
If you have included the first premium with your application and you are otherwise insurable on the date of your application, you ordinarily have the right to expect to have coverage from the date of application even if you are injured or killed while the insurance company is deciding whether to accept your offer. In this case, you are generally protected by the terms of the premium receipt given to you at the time you completed the application.
The technicalities of offer and acceptance, often controlled by the precise wording of your application and the premium receipt can be tricky. If you have an issue with an insurance company, you should contact an attorney for guidance.