Rhode Island Life Insurance Practice Exam

What must be present for a life insurance contract to be valid at its inception?

1. Proof of age

2. Legal residency

3. Insurable interest

4. Medical examination

The correct answer is: Insurable interest

A life insurance contract requires insurable interest to be valid at its inception. Insurable interest means that the policyholder must have a legitimate interest in the life of the insured, typically reflecting financial or emotional ties. This concept is crucial because it ensures that the policyholder has a valid reason for taking out insurance, reducing the potential for moral hazard, where one might benefit from the untimely death of another. Having insurable interest is a foundational ethical principle in insurance that leads to responsible risk management. Without this requirement, there would be potential for abuse in the insurance system, as individuals could purchase policies on lives they have no financial or emotional stakes in, thereby creating a profit motive for inducing loss. In contrast, while proof of age, legal residency, and medical examinations are often necessary for the underwriting process, they do not establish the fundamental validity of the contract itself. The absence of any of these factors might affect the issuance of the policy or its terms, but the presence of insurable interest remains a critical condition for the contract to be deemed valid from the outset.