A life insurance policy is which type of contract?

• A. Commutative
• B. Aleatory
• C. Negotiated
• D. Bilateral

Answer: (B)

Life insurance is an aleatory contract. In an aleatory arrangement, the parties’ performances hinge on a future uncertain event, and the amount paid can be disproportionately large relative to what is exchanged up front. Here, the insured pays premiums, while the insurer’s obligation to pay the death benefit only arises if the insured dies—a future event that may or may not occur and may happen long after the contract starts. That contingency and the unequal value exchanged (premium versus potential benefit) define the aleatory nature of the contract.

The policy is also bilateral, since both sides promise to perform — the insured promises to pay premiums, and the insurer promises to pay the benefit if death occurs — but the most relevant contract-type concept tested is its aleatory nature due to the contingent, uncertainty-based payoff.