Tennessee Insurance Practice Exam

When must insurable interest be present in order for a life insurance policy to be valid?

1. At the time of the beneficiary's death

2. Upon renewal of the policy

3. When the application is made

4. At the time of premium payment

The correct answer is: When the application is made

Insurable interest must be present at the time the application for a life insurance policy is made for the policy to be considered valid. This means that the person applying for the insurance must have a legitimate interest in the life of the insured, such as a family relationship or a financial stake. The rationale behind this requirement is to prevent insurance from being used as a gambling contract; it ensures that the policyholder has a genuine reason to wish for the insured's survival. If insurable interest is absent at the application stage, the policy can be deemed void because it lacks the necessary foundation of a valid contract. While the presence of insurable interest is still relevant throughout the life of the policy, it is primarily evaluated at the application stage. This guarantees that the insurer is entering into a contract that has a purpose rooted in legitimate concern for the insured's well-being.