Certified Financial Consultant (CFC) Practice Exam

What does the consideration clause in a life insurance policy signify?

1. The reasons for policy cancellation

2. The premium to be paid by the insured

3. The duration of the policy

4. The total benefits provided by the policy

The correct answer is: The premium to be paid by the insured

The consideration clause in a life insurance policy signifies the premium that the insured is required to pay. This clause establishes the obligation of the policyholder to make regular premium payments in exchange for the insurance coverage provided by the insurer. It is a critical element of the contract, as it ensures that the insurer receives adequate compensation for the risk taken on by guaranteeing the death benefit to the insured's beneficiaries upon death. The consideration provided by the insured legitimizes the contract, as it reflects the financial contribution necessary to activate and maintain the policy throughout its duration. This clause essentially defines the mutual exchange of value—monetary compensation from the insured and risk coverage from the insurer.