Life & Health Insurance Practice Exam 2026 – Your All-in-One Guide to Exam Success!

Insurable interest is a fundamental principle in insurance that requires specific relationships between the insured and the party seeking insurance coverage. For insurable interest to exist at the time of a policy's issuance, there must be a legal relationship between the insured and the beneficiary. This relationship ensures that the beneficiary would suffer a financial loss or hardship if the insured were to die or suffer a loss. The underlying rationale is to prevent insurance from being taken out on individuals or properties in which the policyholder has no stake, thereby minimizing moral hazard and fraudulent claims.

This legal relationship is crucial because it demonstrates that the beneficiary has a genuine interest in the continued life or well-being of the insured, thereby legitimizing the insurance policy. For example, a spouse has an insurable interest in the life of their partner due to their financial and emotional ties.

Other options like solely requiring the agreement of the insured, naming a beneficiary, or having the premiums fully paid do not address the necessity of a legally recognized relationship between the insured and the beneficiary. Therefore, the only scenario that adequately reflects the requirement for insurable interest at the time of issuance is the existence of this legal relationship.