Massachusetts Life Producer Practice Exam

When must insurable interest exist for a life insurance contract to be considered valid?

1. At the time of renewal

2. Throughout the life of the insured

3. At the inception of the contract

4. If the insured is over 18

The correct answer is: At the inception of the contract

For a life insurance contract to be valid, insurable interest must exist at the inception of the contract. Insurable interest refers to the policyholder's legitimate interest in the continued life of the insured, which is necessary to prevent insurance from being used as a gambling mechanism. This principle ensures that the policyholder would suffer a financial loss or hardship upon the death of the insured, thus creating a valid foundation for the contract. The importance of the concept is that once the policy is in force, the existence of insurable interest does not need to be continually demonstrated throughout the life of the insured. Therefore, a person can take out a life insurance policy on someone else's life at the beginning, provided that they have a recognized insurable interest. This requirement protects against moral hazards and promotes responsible and legitimate use of life insurance.