The life insurance contract, like other contracts, must be supported by a valid consideration. In a unilateral contract, consideration is always given in exchange for a promise and, in the case of a bilateral contract, is itself a promise. Since only the company makes an enforceable promise, the life insurance contract is a unilateral contract. The consideration for the insurer�s promise is the first premium or if premiums are to be paid more frequently than annually, the first installment of the first premium. Most life insurance policies state that the company�s promise is given in consideration of the application and the first premium. This is apparently intended to give greater legal effect to the application, on which the company places great reliance. The following are two examples of this provision:

Premiums after the first are not part of the legal consideration since otherwise the contract could not come into existence until they are all paid. Rather, payment of such premiums is a condition precedent to the continuance of the contract. This means that the insurer�s promise is conditioned on the continued payment of periodic premiums. In other words, the contract contains a provision that makes the continued payment of premiums a condition that must occur before the insurer will have to perform on its promises. If the insured defaults in the payment of a premium after the life insurance contract is in force, the company is released (subject to the nonforfeiture laws) from its original promise to pay the face amount of the policy, but it remains obligated to honor various subsidiary promises that are contained in the surrender provisions and the reinstatement clause.

The insurance company is entitled to receive the first premium, or the first installment thereof, in cash; it may, however, agree to accept any valuable property. The premium may be paid in cash, by check, by promissory note,
or�in the absence of a prohibitive statute�by services, such as printing work or advertising. Some states forbid an insurance company to accept payment of any premium in services, presumably because the practice lends itself too readily to rebating. By placing an excessive value on the services rendered, a company or its agent could, in effect, refund a portion of the contractual premium charge. Today, payment of premiums by any method other than cash, policy loans, or financing programs (in the case of some college senior or graduate student plans) is generally prohibited.

Checks are readily accepted by insurance companies, but they are generally treated as conditional payments. That is, crediting the premium is usually conditioned on the bank upon which the check is drawn honoring the instrument. If the check is not honored when presented and the company holds that the premium has not been paid, its promise is no longer operative. This is true even if the check was tendered to the insurer in good faith by the insured. However, when the insured had sufficient funds in the bank to cover the check and the bank�s failure to honor the check was based on a technical defect in the instrument, such as an improper signature or an incorrect date, or on a clerical error on the part of the bank, insurance companies are inclined to recognize a contractual obligation, provided that the premium is subsequently paid in cash or by valid check^.

A company or its properly authorized agent may agree that the check constitutes an absolute payment of the premium. That is, the company accepts the liability of the parties to the instrument in satisfaction of the premium. Although this is not normal procedure, it may occur when the agent gives the applicant an unconditional premium receipt in exchange for his or her check. In this case, if the check is not paid when presented, the company may enforce its rights on the instrument, but it cannot validly claim that the premium has not been paid.

While it is no longer a common practice, a company may also authorize some or all of its agents to accept the insured�s promissory note in payment of the first premium (and subsequent premiums, for that matter). If the note is honored at maturity, there are no complications, but there is a real question about the status of the policy in the event that the note is not paid when due. In anticipation of this complication, a company may stipulate on the note, on any premium receipt, on the policy, or on all three that if the note is not paid at maturity, the policy will be forfeited. If such a provision is included, it will be enforced according to its terms. As soon as the maturity date of the note arrives, if the note remains unpaid, the company is entitled to repudiate the contract.

If the stipulation is included in the note or in the premium receipt but not in the policy, there is a conflict of opinion as to the rights of the company.^. Some courts hold that the provision is invalid on the grounds that it violates the statute in most states that says that the policy and the application constitute the entire contract between the parties. Other courts uphold the provision on the grounds that the statute means simply that the policy contains the entire contract as of the time it was issued. The courts that entertain this view feel that the statute does not prevent the execution of subsequent agreements. They point out that if the policy is construed to contain all possible agreements relating to the contract, it would be contrary to the statute for the company to agree to an extension of time to pay a premium, whereas such agreements are generally recognized. Upholding the provision seems to be in accord with the evident intention of the parties.

If the forfeiture provision is contained in the policy but not in the note or the premium receipt, there is also a conflict of opinion. In states in which the entire-contract statute is strictly followed, the provision contained in the policy will be enforced according to its terms. In other states the decision turns on the interpretation of the note and the receipt. If the note and the receipt evidence an intention on the part of the insurer to accept the note as an unconditional payment, this subsequent agreement will override the provision contained in the policy. On the other hand, if there is no indication of an intention to accept the note as an unconditional payment, the provision in the policy will prevail.

If there is no forfeiture provision in the policy, the note, or the premium receipt, the note is considered to be an absolute payment of the premium, and the insurance company is limited to its rights on the note in the event that it is not paid at maturity. This is the usual case.

It should be observed that if the insurer or its authorized agent extends credit to the insured, the contract will be bilateral rather than unilateral. In this case, the consideration for the insurer�s promise is the insured�s promise to pay the amount of the first premium.

An agent who is not authorized to extend credit on behalf of the company may pay the premium for the applicant. In doing so, he or she is acting as the applicant�s agent, and failure of the applicant to reimburse the agent will not invalidate the policy.