Rhode Island Life Insurance Practice Exam

When must insurable interest be established for a life insurance policy to be valid?

1. When the policy is delivered

2. At the time of premium payment

3. When the application is made

4. At the time of the claim

The correct answer is: When the application is made

Insurable interest must be established at the time the application is made for a life insurance policy to be valid. This requirement is in place to prevent moral hazards and undue speculation on a person's life. Insurable interest refers to the financial interest a policyholder has in the continued life of the insured, ensuring that the policyholder stands to suffer a financial loss if the insured person passes away. By requiring insurable interest to be demonstrated at the application stage, insurers are safeguarding against individuals taking out policies on the lives of those with whom they have no legitimate connection or interest. This principle helps maintain the integrity of the insurance system, ensuring that policies are used for their intended purpose of protecting against unforeseen losses rather than betting on someone's death. Establishing insurable interest at this point also ensures that both the insurer and insured have a clear understanding of the relationship, which is crucial for the policy's enforceability.