Legal Definitions - perpetual policy

A perpetual policy is a unique type of insurance contract that, once established, remains in effect indefinitely without requiring periodic premium payments. Instead of regular payments, the policyholder typically makes a single, substantial initial payment or deposits a sum of money with the insurer. This initial payment or deposit is often invested by the insurer, and the income generated from these investments covers the ongoing costs of the policy, allowing the coverage to continue perpetually as long as the policy's terms are met.

Here are some examples to illustrate this concept:

• Example 1: Historic Building Preservation

  A non-profit organization dedicated to preserving historic landmarks acquires an old mansion. To ensure the building is protected against fire and other damages for generations to come, they purchase a perpetual insurance policy. They pay a significant one-time premium to the insurer. This premium is then invested by the insurance company, and the returns from that investment are used to fund the policy's coverage year after year. This means the organization does not need to budget for annual insurance premiums, and the mansion remains continuously insured indefinitely.

  This example illustrates a perpetual policy because a single, upfront payment secures continuous insurance coverage for the historic mansion without any further recurring premium obligations.

• Example 2: Mutual Property Insurance for Homeowners

  In some specialized mutual insurance companies, particularly for property insurance, homeowners can opt for a perpetual policy. Instead of paying annual premiums, a homeowner makes a one-time deposit with the mutual insurer, often calculated as a percentage of the home's value. This deposit is held by the insurer and earns interest, which then covers the homeowner's share of the company's operating costs and potential claims. As long as the homeowner maintains their membership and the deposit with the insurer, their home remains insured without any further premium payments. If they sell their home and cancel the policy, the deposit is typically returned.

  This demonstrates a perpetual policy through the use of a single, initial deposit that provides ongoing, indefinite property insurance coverage without the need for subsequent premium payments.

• Example 3: Endowment for Institutional Assets

  A large university establishes an endowment fund specifically to maintain and protect its valuable art collection housed in a campus museum. A portion of this endowment is used to purchase a perpetual insurance policy for the entire collection. The university makes a substantial lump-sum payment to the insurer. The insurer invests these funds, and the investment income generated is then used to cover the ongoing costs of insuring the art collection against theft, damage, and other risks. This arrangement ensures the collection is continuously protected without requiring the university to allocate funds from its annual operating budget for insurance premiums.

  This example highlights a perpetual policy where a single, large payment from an endowment fund creates a self-sustaining insurance mechanism, providing indefinite coverage for valuable institutional assets without recurring premium payments.