Rhode Island Life Insurance Practice Exam

When is insurable interest required to be valid in a life insurance contract?

1. At policy renewal

2. At inception of the contract

3. At the time of claim

4. At the policyowner's discretion

The correct answer is: At inception of the contract

In a life insurance contract, insurable interest must exist at the inception of the contract. Insurable interest refers to the legal and financial interest that an individual has in the life of another, which ensures that the insurance policy is not merely a speculative venture. This requirement protects against moral hazard, where a person might otherwise be incentivized to cause harm to someone in order to gain a financial benefit from the insurance payout. When a policy is issued, the insurer needs to confirm that the policyholder has a legitimate interest in the life being insured; for example, a spouse has an insurable interest in the life of their partner, and a parent has an insurable interest in the life of their child. Without insurable interest at the time the policy is created, the contract could be deemed void because it does not fulfill the legal requirement necessary to prevent potential abuse of insurance policies. Insurable interest is not required at the time of policy renewal, at the time of claim, or at the policyowner's discretion, as these situations do not address the foundational need for a valid life insurance contract when it is first established. Therefore, the correct understanding is that insurable interest is a prerequisite that must be satisfied at the time the insurance policy is issued.