There are two parties to the life insurance contract: the insurance company and the owner. The applicant is normally, but not necessarily, the owner and the person whose life is the subject matter of the contract. The person on whose life a policy is issued is the insured. A person or entity who takes out insurance on a person�s life is referred to as the applicant or owner. The person whose life is insured is not a party to the contract unless he or she is also the owner. Two or more persons or entities may jointly apply for insurance on the life of another person, as is the case with some business continuation agreements. In the case of joint policies (either last-to-die or first-to-die) a person or entity may own a policy insuring more than one life.

The designation of a third party to receive the proceeds upon the policy�s maturity does not make such a person a party to the contract. The third-party beneficiary need not know of the contract at its inception, may disclaim any benefits thereunder, and incurs no duties by virtue of his or her designation. The beneficiary may acquire certain rights that are enforceable against the company, but he or she acquires them only through the agreement between the company and the applicant or owner. Furthermore, the beneficiary�s rights can be negated by any defenses available to the insurer against the owner. Even the rights of an irrevocable beneficiary may be defeated. This may be accomplished by policy loans (absent a policy provision requiring the beneficiary�s consent) or by allowing the policy to lapse.

An assignee, while possessing rights quite distinct from those of a beneficiary, occupies a position similar to that of the beneficiary in that he or she is an interested party but is not a party to the contract unless there has been an absolute assignment that has been consented to by the other party. It is worth noting that the voluntary payment of premiums by a person having no other relationship with the policy bestows no contractual rights or privileges on the premium payor.

The contractual relationship between the insurance company and the owner of the policy is that of conditional debtor and creditor. The insurance company incurs obligations only if certain conditions are fulfilled, and then its duty is only to carry out the terms of the contract. The insurance company is not a trustee in any sense of the word and is under no legal obligation to render an accounting of the premiums received or, in the absence of a showing of bad faith, of the apportionment of dividends.

In the absence of specific legislation to the contrary, there is no reason why any person who has the legal capacity to enter into a contract cannot become the insurer under a life insurance contract. Freedom of contract is a constitutional and common-law privilege that must not be abridged unless the nature of the subject matter of the contract makes it a proper subject for the exercise of the police power of the state. Insurance�because of its magnitude, nature, and intimate bearing on the welfare of society�has been adjudged a proper subject for the exercise of such power.

The United States Supreme Court has ruled that a state may prohibit the making of insurance contracts by persons, either natural or artificial, who have not complied with the requirements of the law of the state. In many states, the statutes specifically prohibit natural persons (that is, human beings) from acting as life insurers. Even in those states that have not so legislated, the nature of the business�with its need for continuity and permanence of the insurer�has brought about the same result. Hence, while individual insurers were common in the early days of life insurance, today the legitimate insurance business is conducted exclusively by corporate insurers. If a corporation seeking to write life insurance in a particular state is legally organized, the only question that can arise regarding its capacity to contract is whether the corporation has complied with all the requirements for doing business in that state.

A contract issued by an unlicensed insurer is usually enforceable by the policyowner. This rule of law recognizes that a person who is solicited to buy insurance cannot be expected to inquire into the affairs of the insurance company to determine whether or not it has complied with all the statutory and regulatory requirements governing its operations and is fully qualified to enter into the proposed contract. On the contrary, the prospective insured is permitted to assume that the insurer is legally competent to enter into the proposed contract. In the event of a dispute, the insurer will not be permitted to use its own violation of statutory requirements as a defense against claims.

In order to assist the insured in enforcing claims against an unauthorized out-of-state insurer, all of the states (but not the District of Columbia) have enacted the Unauthorized Insurers Service-of-Process Act, which designates the insurance commissioner or some other state official as the agent of the unauthorized insurer for the purpose of accepting service of process. Designed to deal with companies that do business by mail, these statutes permit the insured to secure a judgment against the insurer in the courts of his or her own state. This judgment must be given "full faith and credit" by the courts of all other states in which the insurer has assets. Agents of unauthorized insurers are subject to both criminal and civil penalties and, in some states, are personally liable for claims under contracts they sold. It hardly seems necessary to add that an unlicensed insurer cannot maintain an action to enforce any claim arising out of an insurance contract made in violation of the laws of the state in which the suit is brought.

If the insurer is duly authorized to do business in a particular state but has failed to comply with some other requirement of the state law, the validity of its contracts will usually not be affected by the noncompliance. The contracts will be binding on both parties, but the insurer will be subject to whatever penalties are imposed for the violation of the law. If the statute requires certain provisions in such a contract, the contract will be deemed to contain such provisions.

All individuals are presumed to have legal capacity except those belonging to clearly defined groups that are held by law to have no capacity or only limited capacity to contract. For example, an alien enemy and a person judicially determined insane are wholly incompetent to enter into a contract. Others, such as minors and those who are mentally infirm but not adjudicated incompetent, have varying levels of contractual capacity.

Minors�or infants, as they are known to the law�do not lack capacity in the absolute sense and may enter into contracts that are binding on the other party. However, subject to certain restrictions, a minor can disaffirm a contract at any time during minority and demand a return of the monetary consideration that passed to the other party. Limitations on the right of a minor to void contracts are found in the general rules that an infant is bound to pay the reasonable value of necessities actually furnished to him or her. If the minor can make restitution for that which he or she received, it must be done.

American courts have held that a life insurance policy is not a necessity for a minor in the legal sense of the word. Hence, absent a statute to the contrary, a minor can disaffirm a life insurance contract at any time during minority and recover all premiums paid. A majority of the courts permit full recovery of premiums with no deduction for the cost of protection, while a few courts authorize the company to retain that portion of the aggregate premiums applied toward the cost of protection. In the latter case, recovery is limited to the policy�s cash value or reserve. It is clear that only by permitting the insurer to deduct the cost of protection does the court compel the minor to make restitution to the insurer.

In recognition of the importance of life insurance and of the unfavorable position of a life insurance company in dealing with minors, most states have enacted statutes conferring the legal capacity to enter into valid and enforceable life insurance contracts covering their own lives on minors of a specified age and older. The age limit varies from 14 to 18, with age 15 predominating. A minor who satisfies the age requirement is permitted not only to purchase a life insurance policy but also to exercise all ownership rights in the contract. The statutes usually require that the beneficiary be a close relative; the eligible relationships are set forth in each state�s law. Some of the statutes bestow legal capacity on a minor only for the purpose of negotiating insurance on his or her own life; the minor (in those states) still lacks legal capacity to become the owner of a policy on the life of another person.

A life insurance contract entered into between an American company and a resident of a foreign country is just as valid as one made with an American citizen unless a state of war exists between the two countries, in which case the contract is null. In the first instance, the resident of the foreign country would be described as an alien friend; in the second, as an alien enemy. A contract made with an alien friend is valid in all respects, while one with an alien enemy is void. No difficulties are likely to arise unless an alien friend with whom a contract has been made becomes an alien enemy through the outbreak of hostilities. In that event, it will generally be impossible, as well as contrary to public policy, for the parties to carry out the terms of the contract. In the case of life insurance, premium payments could not be made (unless the company had a branch office in the foreign country), and a question would arise as to the status of the policy.

The rulings of the courts in cases involving this problem have been diverse. In Connecticut and a few other states, it is held that all rights in such contracts are terminated and all equities forfeited. This is a harsh rule and permits the enrichment of the insurance company at the expense of one whose nonperformance was beyond his or her individual control.

A much larger number of states, including New York, hold that the contract is merely suspended during hostilities and can be revived by payment of all past-due premiums. Under this rule the policy of a deceased policyowner can be revived and the company forced to pay the face amount. This rule obviously exposes the company to a high degree of adverse selection.

A third rule, established in 1876 by the United States Supreme Court, holds that a contract is terminated for nonpayment of premiums caused by the outbreak of hostilities, but the policyowner is entitled to the reserve value computed as of the date of the first premium in default. The reserve is paid over to the governmental agency charged with the responsibility of assembling and holding property belonging to alien enemies. Under this rule, no action can be brought to recover the face amount of the policy; nor is the company under any obligation to revive the policy.

Although none of these solutions to the problem is completely satisfactory, the basis of settlement prescribed by the Supreme Court in 1876 seems to be the most equitable. However, that case was decided before nonforfeiture values were a common provision. It was also based on federal common law, which no longer exists. Today the practice would likely be to apply the automatic nonforfeiture provisions and perform the contract as written.