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What is the principle of 'insurable interest' in life insurance, and when must it exist?

Reviewed by Jordan Morley, Editorial Lead at 247SimpleTests. Written by the 247SimpleTests Editorial Team from the official source material cited on every question.

Correct answer

It is the requirement that the policyowner have a legitimate interest in the continued life of the insured, and it must exist at the time the policy is issued (inception)

  1. A It is the requirement that the policyowner have a legitimate interest in the continued life of the insured, and it must exist at the time the policy is issued (inception)
  2. B It must exist at the time of the claim only
  3. C It must exist only after the death benefit is paid
  4. D It never needs to exist

Why this is the answer

Insurable interest means the policyowner must stand to suffer a genuine loss — financial or emotional — if the insured dies, which prevents life insurance from being used as a wager on a stranger's life. In life insurance, insurable interest must exist at the time the policy is applied for and issued (inception), but, unlike in property insurance, it does not need to exist at the time of the claim. People are generally considered to have insurable interest in their own lives, and in the lives of close family members or business partners with a financial relationship. This principle is a foundational concept tested on life insurance exams.
Source: NAIC Model Outline, Insurable Interest

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About this topic: Life Insurance Basics

Life insurance basics cover insurable interest, risk and the law of large numbers, the parties to a contract, the application and the elements that make a life policy a valid contract. This is one of 6 Life Insurance questions on life insurance basics, each with a full explanation on a single study page.

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