Certified Financial Consultant (CFC) Practice Exam

What describes a unilateral contract in insurance terms?

1. A two-sided agreement

2. One-sided; Only one party makes an enforceable promise

3. A contract guaranteed by a government

4. A contract that requires mutual consent

The correct answer is: One-sided; Only one party makes an enforceable promise

A unilateral contract in insurance terms is defined as one-sided, where only one party makes an enforceable promise. In the context of insurance, the insurer promises to pay a benefit upon the occurrence of a specified event, such as a death or loss. The policyholder, on the other hand, does not make any enforceable promises; they simply pay premiums in exchange for the coverage provided. This structure exemplifies a unilateral contract because the enforceability of the promise is strict to the insurer, allowing for the policyholder to claim benefits as stipulated in the policy without a reciprocal obligation. Understanding this concept is crucial, especially in the context of insurance products, because it highlights the nature of the obligations involved. It clarifies that while the insured party has coverage, their actions do not create any further enforceable promises back to the insurer. The core of a unilateral contract is the imbalance in the promise, demonstrating that the insurer bears the risk, which is a foundational principle in insurance policy design.