Life & Health Insurance Practice Exam 2025 – Your All-in-One Guide to Exam Success!

Insurable interest must exist at the inception of the contract for a life insurance policy to be valid. This means that when a policyholder applies for insurance, they need to demonstrate that they have a legitimate interest in the life of the insured. Insurable interest is a fundamental principle that ensures the policyholder stands to benefit in a financial sense from the continued life of the insured. This requirement helps to avoid moral hazard, where someone could potentially have a financial gain from the death of another person without having a legitimate interest in their wellbeing.

When insurable interest is assessed at the inception of the contract, it establishes a legitimate reason for the insurance arrangement, fostering trust in the insurance system that the policyholder is not taking advantage of the situation. If insurable interest is not present at the start of the contract, the policy may be deemed void, meaning that any claims made against it could be denied.

In this context, other time frames such as during the application process, at policy payment time, or before contract renewal do not align with the legal requirements surrounding insurable interest as it pertains to life insurance contracts.