Massachusetts Life Producer Practice Exam

Which of the following best describes the concept of insurable interest?

1. Interest in any financial gain

2. An established personal stake in the insured's life

3. Interest limited to certain types of policies

4. A passive interest without any financial implications

The correct answer is: An established personal stake in the insured's life

The concept of insurable interest is fundamentally tied to the principle that a policyholder must have a legitimate interest in the life or property that is being insured. This means that the policyholder should be personally affected by the loss of the insured individual or asset. Thus, having an established personal stake in the life of the insured directly supports the need to have a valid reason to purchase a life insurance policy. This requirement not only helps to prevent moral hazard—where someone might wish for the insured to die to financially benefit from the policy—but also ensures that insurance serves its core purpose of risk management rather than merely being an avenue for speculation. The idea is that if something happened to the insured, it would negatively impact the policyholder, creating a legitimate interest in ensuring that the insured is protected. This personal stake differentiates it from mere financial gain, which does not qualify as a valid reason for insuring someone else's life. The principle of insurable interest is essential for the validity of insurance contracts and is typically required at the inception of the policy.