South Carolina Life Insurance Practice Exam

When must insurable interest be established in a life insurance policy?

1. At the time of application

2. At the time of claim

3. After the policy is in force

4. Only upon renewal

The correct answer is: At the time of application

Insurable interest must be established at the time of application for a life insurance policy. This requirement is fundamental in insurance practice, as it ensures that the policyholder has a legitimate interest in the life of the insured. Insurable interest exists when the policyholder would suffer a financial loss or hardship in the event of the insured's death. This concept is crucial to prevent gambling on lives, which is illegal and unethical. If insurable interest were only needed later, such as at the time of claim, it could lead to situations where individuals take out policies on lives they have no legitimate financial interest in, thereby encouraging moral hazard. Additionally, establishing it after the policy is in force or only upon renewal would undermine the foundational purpose of life insurance, which is to provide security and protection based on genuine relationships and interests.