California Life-Only & Accident and Health AgentGeneral InsuranceMedium
A life insurance agent is explaining the concept of 'insurable interest' to a new client. Which of the following scenarios best exemplifies a valid insurable interest for purchasing a life insurance policy?
- AA neighbor purchasing a policy on a celebrity they admire.
- BA business partner purchasing a policy on a key employee whose death would cause financial loss to the company.
- CA distant relative purchasing a policy on a wealthy acquaintance without their knowledge.
- DAn individual purchasing a policy on a random stranger they met on the street.
Show answer & explanationAnswer & explanation
Correct answer: B. A business partner purchasing a policy on a key employee whose death would cause financial loss to the company.
Insurable interest in life insurance requires a reasonable expectation of suffering a financial loss if the insured dies. A business partner would suffer financial loss from the death of a key employee, thus establishing insurable interest.
Why the other options are wrong
- A. Admiration does not constitute a financial loss, so no insurable interest exists.
- C. A distant relative without a clear financial dependency or relationship, and without the insured's knowledge, would not have insurable interest.
- D. There is no financial or familial connection, therefore no insurable interest.
Insurable Interest (Life)
In life insurance, insurable interest exists when the policyowner would suffer a financial or emotional loss if the insured dies.
- Must exist at the time of policy inception (purchase).
- Common relationships include self, spouse, children, business partners, and key employees.
- Prevents individuals from profiting from the death of others.
Memory trick: Love or loss, a tie that binds the policy to the person.