LEGAL REQUIREMENTS

Offer and acceptance | Consideration | Utmost good faith and the declaration 

Insurable interest | Capacity to contract 

To be legally binding the contract must meet certain conditions.

a. Offer and acceptance

The individual who requires life assurance (the proposer) will complete a proposal from form or coupon advertisement from the press and send it to the insurance company, thus offering himself for insurance. If the insurers find the form in order and if they wish to enter into the contract, they will send a letter to the proposer accepting the proposal.

b. Consideration

This is the premium to be paid by the proposer and the promise to pay on the happening of the event by the insurer.

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c. Utmost good faith and the declaration

The proposer has a responsibility not to mislead the insurer before the contract is finalised. The 'utmost good faith' must be observed at all times and when the proposer completes the proposal form he must answer the questions truthfully, revealing all the various materials which he alone will know and which are unlikely to be known to the insurers. Material factors would include answers to questions regarding the proposer's medical history and current medical condition and withholding that that type of information might mislead the insurers into offering better rates than the risk may justify. 

However; because proposer cannot mention facts of which he is not aware he is asked to sign a 'declaration' stating that the answers given are correct to the best of his or her knowledge and belief. The declaration will also ask the proposer to agree to the rules of the insurance company and, in many cases, agree that further medical evidence may be obtained if necessary. In addition it will further state that any statements made to a medical examiner will form, together with the proposal, the basis of the contract.

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d. Insurable interest

In the early days of life assurance people effected policies on other peoples' lives when they thought these people would die. This was merely a form of gambling. This was not in the public interest as such contracts could not be enforceable in law. A law was passed, the Life Assurance Act (1774) sometimes referred to as the "Gambling Act", to regulate life assurance contracts. The effect of the law is that:-

1. The proposer must have an interest in the life of the person being insured, at the time the insurance is effected. Obviously a person has an interest in his or her own life and can therefore insure it. Proposes can only insure someone else's life if they would suffer financially by that person's death.
2. The interested party must be named in the policy.
3. No greater amount than the proposer's interest can be recovered.

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