Tennessee Insurance Practice Exam

When must insurable interest exist for a life insurance contract to be valid?

1. At any time during the policy

2. Upon renewal of the policy

3. Inception of the contract

4. Before filing a claim

The correct answer is: Inception of the contract

Insurable interest must exist at the inception of a life insurance contract for it to be valid. This requirement ensures that the policyholder has a legitimate interest in the life of the insured, which serves as a safeguard against moral hazard. The principle of insurable interest prevents individuals from taking out policies on lives in which they have no vested interest, thus reducing the potential for insurance fraud. When the insurer issues the policy, they need to ensure that the policyholder could suffer financial loss or emotional distress due to the death of the insured. This foundational aspect supports the ethical functioning of the insurance system and helps maintain its integrity. Without this principle being satisfied at the contract's start, the contract may be deemed void from a legal standpoint, making it critical for the stability of the insurance marketplace. In contrast, having insurable interest at any other point—such as during policy renewal or before a claim is filed—would not fulfill the requirement necessary to validate the contract from the outset.