South Carolina Life Insurance Practice Exam

What is the significance of having insurable interest in a life insurance policy?

1. It allows for higher premiums

2. It is required for the policy to be enforceable

3. It guarantees payment on claims

4. It limits the amount of coverage available

The correct answer is: It is required for the policy to be enforceable

Having insurable interest in a life insurance policy is fundamental to the enforceability of the contract. Insurable interest means that the policyholder has a legitimate interest in the continued life and well-being of the insured person. This concept is crucial because it helps to prevent moral hazards and ensures that insurance is used for its intended purpose: to protect against the financial loss associated with the death of someone who has a close relationship with the policyholder, such as a family member or business partner. Without insurable interest, a life insurance policy could be deemed a wager on the life of another, which could lead to unethical situations where one might benefit from the death of another individual. Thus, the requirement of insurable interest serves to uphold the integrity of insurance contracts by ensuring that the policyholder would suffer a financial loss upon the insured’s death, thus justifying the need for insurance. In summary, the requirement for insurable interest ensures that life insurance remains a legitimate financial product designed to provide security and protection rather than serving as a speculative financial instrument.