Connecticut Life Producer Practice exam

Which of the following statements is true about insurable interest?

1. It must exist at the time of policy renewal

2. It is required only for business insurance policies

3. It must exist at the time of application

4. It is not necessary for life insurance

The correct answer is: It must exist at the time of application

Insurable interest is a fundamental principle in insurance that requires the policyholder to have a legitimate stake in the life or property being insured. This means that the policyholder will suffer a financial loss or hardship if the insured person dies or if the insured property is damaged or destroyed. The requirement for insurable interest to exist at the time of application ensures that a meaningful relationship between the policyholder and the insured is established before the insurance coverage begins. This helps prevent moral hazards and fraud, as it is understood that one should only be able to benefit from the life or property of another if they have a financial interest in it. In contrast, the other options present statements that do not accurately reflect the insurable interest requirement. For instance, suggesting that it must exist at the time of policy renewal does not align with the principle, as the focus is on the initial application phase. Asserting that insurable interest is required only for business insurance policies is also misleading, as it is a universal requirement that applies to all types of insurance, including personal life policies. Lastly, claiming that insurable interest is not necessary for life insurance contradicts the core idea that one must have a stake in the outcome of the life insured. Thus, recognizing the requirement for