Massachusetts Life Producer Practice Exam

What is required for insurable interest to be valid throughout an insurance contract?

1. It must be established at the time of the claim

2. It must exist during the entire life of the insured

3. It is only needed at inception

4. It must be documented in writing

The correct answer is: It must exist during the entire life of the insured

Insurable interest refers to a policyholder's stake in the insured risk; in other words, it is the financial interest or relationship that a policyholder has in the life of the insured individual that justifies the insurance coverage. For insurable interest to be valid throughout a life insurance contract, it must exist during the entirety of the insured's life. This requirement ensures that the policyholder has a legitimate reason to maintain the policy, as the purpose of life insurance is to provide financial protection in case of the insured's death. This ongoing need for insurable interest helps prevent insurance fraud, where a person might take out a policy on someone with whom they have no genuine relationship or interest. If insurable interest did not need to be maintained throughout the life of the insured, individuals could potentially profit from the death of others without any meaningful connection, thereby undermining the fundamental principles of insurance. In contrast, establishing insurable interest only at the time of the claim does not provide a valid framework for an insurance contract, as it would allow individuals to create artificial stakes in others' lives post-factum. Moreover, it is not sufficient for insurable interest to only be required at the inception of the policy without ongoing validity; and while documentation may be helpful