Rhode Island Life Insurance Practice Exam

When there is third-party ownership involved, what is required of applicants who are also the primary beneficiary?

1. No requirement for insurable interest

2. Must be a family member of the insured

3. Must have insurable interest in the proposed insured

4. Must be a co-owner of the policy

The correct answer is: Must have insurable interest in the proposed insured

When third-party ownership is involved in a life insurance policy, it is essential that the applicant, who is also the primary beneficiary, demonstrates insurable interest in the proposed insured. Insurable interest is a legal requirement that ensures the applicant has a legitimate interest in the life of the insured. This means that the applicant will suffer a financial loss or hardship if the insured were to pass away. Having insurable interest is crucial to the ethical and legal standing of the life insurance contract. It prevents individuals from taking out insurance on the lives of strangers without a valid reason and helps to maintain the integrity of the insurance system. In situations involving family members, or individuals in business arrangements, that connection often establishes the necessary insurable interest, but it is not restricted solely to familial relationships. In contrast, options that suggest no requirement for insurable interest or that the beneficiary must be a co-owner of the policy do not reflect the necessity of proving a financial stake or relationship to the proposed insured in a third-party ownership scenario. Therefore, requiring insurable interest remains a fundamental principle in life insurance practices, applicable in these contexts.