A Brief Introduction About Aleatory Contract
What is an aleatory contract?
As per the aleatory definition, it is the happening of something at random, not planned.
Hence, this contract refers to insurance payouts that are not balanced. The insured has to keep paying the premiums and gets only coverage until the event occurs. The payouts made when the event occurs are far higher than the premiums paid. If the event does not happen, then the promise or payout will not take place.
An example of such contracts is a life insurance policy. In life insurance policies, the policyholder does not benefit from it; the beneficiary who makes a claim on the death of the insured does. Death is an unpredictable event, so the beneficiary may not receive anything if the insured lives until the maturity of the policy.
The insurer makes the payout provided the policy is in force, meaning that the policyholder needs to ensure that the premium payments are up to date. If the insured has defaulted, then the beneficiary will not receive anything when the insured passes away.
Who Takes Aleatory Contract? – People Involved
This contract is taken by an individual who needs to protect his or her family and the insurance company.
The person taking the policy or the insured pays an annual premium for the coverage, and the insurer pays the sum assured to the beneficiary in the event of the death of the insured.
Purpose of Aleatory Contract – Why Do You Need It?
You need to ask yourself what your family will do in the event of your untimely demise. One cannot predict when they will die. If you are the breadwinner of your family, then they are dependent on you for their sustenance. In the unfortunate event of your death, your family will not have any financial support.
It is for this reason that you need to protect yourself for the entire tenure of your active life so that in the event you are not there, your family can maintain the same standard of living as they did when you were alive.
One of the best forms of protection is insurance. You take adequate insurance cover to protect your family in the event of any emergency. In order to protect your family through the insurance policy, the insurer charges you a premium at a certain frequency.
Aleatory insurance is a contract between you and the insurance company. The contract is valid as long as you pay the premiums on time. You will not get any benefit from the policy; your dependents will participate in the event of your death.
There are no guaranteed returns in such contracts, and the payout takes place when the insured dies while the policy is active, and the amount exceeds the premiums paid.
Contents of the Aleatory Contract – Inclusions
There are two parties to such contracts, the insured and the insurer. The information that is included in this contract is as under:
- Names of the parties to the contract: The full name of the insured and the insurer
- Insurer Registration information: The Registration details of the insurer including the required permission from the regulatory authorities and the complete office address
- Information about the insured: The complete communication details of the insured
- Policy details: The type of policy, the amount covered by the policy or benefit amount, the premium amount or the amount payable for the coverage, due date of the premium and the tenure of the policy
- Issue date of the policy: The date on which the policy is issued
- Policy number: The unique policy number assigned to the policy
- Risk class: This clause will provide details about the insured being a smoker or a non-smoker
- Additional Riders: Riders are additional clauses to the contract for which an extra premium need to be paid
- Beneficiary: The names of the beneficiaries should be mentioned including the percentage to be paid to each in the event of the death of the policyholder
- Contestability period: This a period two years from the date of issue of the policy where your personal details and information are confirmed by the insurer and claims are contested or denied
- Exclusions: There are certain situations under which the policy claim will not be entertained like suicide committed by the policyholder during the contestability period. This is included in the policy
How to Draft the Aleatory Contract?
Points to Consider While Preparing the Aleatory Contract
The aleatory contract definition says that a particular action will be performed contingent on a specific event taking place.
Here are some of the points to be kept in mind while drafting these contracts:
- Who is involved in the contract: It is important to determine who are the parties involved in the contract and the relationship between them?
- Information about the insurance company: All the information regarding the insurance company including the year of formation, permission to issue insurance policies as per the rules laid down by the regulatory authority, complete address and communication details
- Details of the insured: Information about the insured including the age at which the policy has been taken, the names of the dependents and all communication details
- Benefit amount: The benefit amount that will be paid to the beneficiaries of the policyholder on his or her death
- Type of policy: Whether this is a temporary policy or permanent policy
- Riders to the policy: If any additional benefit will accrue to the beneficiary for which an additional premium has been paid
- The effective date of the policy: The date of issue of the policy
- You need to determine whether the policyholder is a smoker or non-smoker. The premiums for a non-smoker are much higher as they pose a higher risk
In an aleatory contract, the policyholder should go online and look for insurers offering similar insurance policies. You should look for the benefits offered by these companies versus the premium being charged by them.
After determining what you need from the benefits offered by the insurer, you can negotiate the best rates possible.
Benefits & Drawbacks of Aleatory Contract
The benefits of an aleatory contract are as under:
- Protection of interest: The interest of both parties to the contract are protected by such contracts. The insured is aware that in the event of his or death during the tenure of the policy and if all premiums due till the date of death have been paid, the beneficiaries are entitled to the benefit amount of the policy. The insurer will not pay the benefit amount to the nominees of the insured if he or she commits suicide during the contestability period or has withheld relevant information from the insured
- Contingent on happening of an event: If the event of death does not take place, the insurer does not have to pay out the policy cover. The premiums then become the income for the insurer
The drawbacks of an aleatory contract are as under:
- Uncertainty of event: The occurrence of the event of the death of the insured must take place for the payout to happen. If the insured lives till the date of maturity of the contract, no payout needs to be made by the insurer. The dependents of the insured are not entitled to anything
- Claim contested: Claims by the insured will be contested during the first two years of the contract known as the contestability period and might be rejected as well.
What Happens in Case of Violation?
In the case of these contracts, the insured or the policyholder pays a certain sum every year to ensure the continuation of the policy coverage(1). In the event of the death of the policyholder, the insurer is expected to pay the benefit amount to the nominees of the insured.
In return for the premiums received from the insured, the insurer provides a specific coverage that has to be paid out on the occurrence of a particular event, meaning death.
If the insurer refuses to pay out the benefit amount to the beneficiaries in the event of death of the insured in spite of the fact that all premiums to date have been paid and the insured has not committed suicide, then the insurer has violated the policy and is liable to pay the claim along with any penalty decided the court along with legal costs incurred by the beneficiaries to realize the claim.
The beneficiaries will not get the benefit amount if the insured has not paid the premiums until the date of death, as this constitutes a violation of the agreement. The insurer will not pay out the policy coverage amount.
It is, therefore, important for the policyholder to pay the premiums on time and read all the terms and conditions of the contract before signing it(2).
An aleatory contract serves a very important purpose for the insured as it provides financial protection to his/her family in the unfortunate event of their death.
However, it is important for the policyholder to remember that a contract comes with certain exclusions. The insured should read the terms and conditions of the contract and avoid certain acts like committing suicide as this amount to a breach of the contract and renders it null and void.
The policyholder should also ensure that premiums for the policy must be paid before the due date, and there should be no default as this is a violation of the policy terms.
If premiums are not paid on time, the insurer will not honor any claim made by the dependents. The insured should also provide accurate information regarding their age and health. If the insurer discovers that any information is inaccurate, the entire contract is void.
So, the policyholder should pay all premiums to ensure that his or her family is protected.