Rhode Island Life Insurance Practice Exam

What characterizes a life insurance policy as a wagering contract?

1. Insurable interest

2. Level premium payments

3. Insured's health history

4. Lack of insurable interest

The correct answer is: Lack of insurable interest

A life insurance policy is characterized as a wagering contract when there is a lack of insurable interest involved. In insurance terms, insurable interest refers to the policyholder's legitimate interest in the life of the insured that ensures they will incur a financial loss if that person's life is lost. When a policy is structured without insurable interest, it resembles a wager or gamble on the occurrence of the insured event, as the policyholder does not have any genuine stake in the insured's life or well-being. In contrast, when insurable interest is present, the contract is designed to protect against the financial loss associated with death, which is the foundational principle of insurance. Thus, the presence or absence of insurable interest is crucial in determining whether a life insurance policy functions correctly as a protective financial tool rather than a speculative gamble. This principle guards against moral hazards and ensures that life insurance serves its intended purpose of risk management rather than being treated as a mere betting arrangement.