Life insurance is a contract between the insurance company and an insured, or policyholder, in which the company promises that at the death of the insured, the company will pay a certain amount of money to a person the insured designates in the contract, if that person survives the insured. In return for the promise to pay, the insured will pay the life insurance company a premium, which serves as the consideration for the contract.
Life insurance is considered a third party beneficiary contract because it is made for the benefit of a person who is not a party to the agreement. Life insurance is considered a type of will substitute because it is functionally equivalent to a will, but the assets are transferred to the beneficiary within the donee’s lifetime. Life insurance is distinct from an annuity contract in which the policyholder pays an insurance company in exchange for guaranteed regular disbursements, usually during retirement.
California’s Insurance Code §10110 outlines the possible life insurance policies that can be offered based on the interests of the policyholder:
“Every person has an insurable interest in the life and health of:
- Any person on whom he depends wholly or in part for education or support.
- Any person under a legal obligation to him for the payment of money or respecting property or services, of which death or illness might delay or prevent the performance.
- Any person upon whose life any estate or interest vested in him depends.”
[Last updated in June of 2023 by the Wex Definitions Team]