What is Aleatory Contracts?
An aleatory contract refers to an agreement between two parties in which the parties do not have to perform any actions until a certain trigger event occurs. Such trigger events cannot be controlled by either of the parties, such as natural disasters and death.
Such contracts are common in insurance policies where the insurer doesn't have to pay to the insured until a triggering event occurs, such as the vehicle being stolen or damaged due to natural disaster. Aleatory contracts, also known as aleatory insurance, turn out to be helpful because they support the insured person to deal with the financial risk.
Understanding Aleatory Contracts
In the insurance sector, the aleatory contract can be thought of as an insurance agreement with an unbalanced payout to the insured. The insured pays the premiums without receiving anything in return besides coverage until the policy pays out. In the event of a payout, it can far outweigh the premiums paid. Sometimes, the policy may lapse, and the event for payout may not occur at all.
In another case, if the insured happens to miss the premium payments, the insurer may not be obliged to pay the policy benefit. In the case of life insurance policies, if the insured doesn't die during the policy term, the insurer will not pay anything on policy maturity.
Another Type of Aleatory Contract
There is another type of aleatory contract called an annuity, where each party has a defined set of risk exposure. An annuity contract is an agreement between an insurance company and individual investor where the investor agrees to pay a lump sum or a series of premiums to the annuity provider. In return to the investment, the insurance company is bound to make regular payments to the annuity holder, annuitant, once a certain milestone event occurs, such as retirement.
There are two possibilities in this case:
If the investor withdraws the money early, the premiums paid into the annuity may be lost.
If the investor lives a long life, he will receive payments for a long time that may far exceed the original annuity amount paid.