Texas General Lines — Life, Accident, Health and HMOGeneral InsuranceMedium
A life insurance agent is explaining the concept of 'insurable interest' to a prospective client. Which of the following statements accurately describes when insurable interest must exist in a life insurance contract?
- AAt all times throughout the duration of the policy.
- BOnly at the time of policy delivery to the policyowner.
- COnly at the time of claim for the beneficiary to receive benefits.
- DOnly at the time of application when the policy is issued.
Show answer & explanationAnswer & explanation
Correct answer: D. Only at the time of application when the policy is issued.
For life insurance, insurable interest must exist at the time the policy is purchased (i.e., when the application is made and the policy is issued). It does not need to exist at the time of death.
Why the other options are wrong
- A. This is incorrect for life insurance; insurable interest does not need to be continuous throughout the policy's life.
- B. Policy delivery is a key step, but the crucial point for establishing insurable interest is at application/issuance.
- C. If insurable interest were only required at the time of claim, it could lead to speculative purchases and moral hazards.
Insurable Interest (Life Insurance)
The financial or emotional relationship between the policyowner and the insured person that must exist at the time the life insurance policy is issued.
- Required at the time of application/issuance, not necessarily at the time of death.
- Examples: self, spouse, children, business partners, financial dependents.
- Prevents gambling on human lives.
Memory trick: Life's interest starts at the beginning, property's interest needs to keep on spinning.