Consideration clause
Also known as: consideration provision
The consideration clause in an insurance policy states what each party gives to make the contract binding: the insured provides the premium and the statements in the application, and the insurer provides its promise to pay covered claims.
Every enforceable contract requires consideration — something of value exchanged by both parties. In an insurance policy, the consideration clause spells this exchange out. The policyowner's consideration is twofold: the payment of premiums and the truthful statements made in the application. The insurer's consideration is its promise to pay benefits or indemnify losses as described in the policy.
The clause typically appears at or near the front of the policy, often on the policy face or with the insuring agreement, and states the premium amount and when it is due. Notably, the two sides' consideration doesn't have to be equal in value — a policyowner may pay a single premium and collect a death benefit many times larger, which is why insurance is classified as an aleatory contract.
Including the application's statements as part of consideration has real consequences. Because those representations helped induce the insurer to issue the policy, material misstatements can give the insurer grounds to void coverage or deny a claim during the contestable period. That is also why producers must record application answers exactly as the applicant gives them.
The consideration clause is standard testable material on life and health insurance licensing exams. The life, health, and life & health exams all cover it among the critical policy clauses and provisions — know what each party's consideration is, and remember that the application's statements count alongside the premium.
Key takeaways
- The consideration clause defines what each party exchanges: premiums plus application statements from the insured, and the promise to pay from the insurer.
- Consideration from the two parties does not need to be equal — insurance is an aleatory contract.
- The clause usually states the premium amount and payment schedule and appears near the front of the policy.
- Because application statements are part of consideration, material misrepresentations can jeopardize coverage.
- Life and health licensing exams test the consideration clause among the core policy provisions.