Connecticut Life Producer Practice exam

When must insurable interest exist in life insurance policies?

1. At the time of loss

2. At the time of application

3. Only during the underwriting process

4. Only for business insurance

The correct answer is: At the time of application

In life insurance policies, insurable interest must exist at the time of application. This principle ensures that the policyholder has a legitimate interest in the continued life of the insured, which means they would suffer a financial loss or hardship if the insured were to pass away. This requirement helps to prevent moral hazard, where a policyholder might benefit financially from the death of the insured without any real connection to them. If insurable interest were only required during the underwriting process or at the time of loss, it could potentially allow for abusive practices, such as wagering on someone else's life. Furthermore, while insurable interest is important for business insurance, it is a broad requirement that applies to all types of life insurance policies, not just those associated with businesses. Thus, the requirement at the time of application is crucial for maintaining the integrity of life insurance contracts and ensuring that they are used for their intended purpose.