AD Banker Comprehensive Practice Exam

What is necessary for insurable interest in life insurance?

1. Death

2. Policy renewal

3. Application

4. Policy delivery

The correct answer is: Application

Insurable interest in life insurance is a fundamental concept that ensures that the policyholder has a legitimate interest in the life of the insured person. This means that the policyholder would face a financial loss or hardship if the insured were to pass away. For a life insurance policy to be issued, there must be insurable interest at the time of the application. This requirement is in place to prevent moral hazard and ensure that insurance serves its intended purpose of protection rather than speculation. When an individual applies for life insurance, they must demonstrate that they would suffer a financial consequence if the insured dies. This could be due to relationships like that of a spouse, parent, or business partner, where the policyholder would be adversely affected financially by the death of the insured. Therefore, the application stage is crucial because it is the point at which the insurer assesses the existence of insurable interest. Other options like death, policy renewal, and policy delivery do not establish insurable interest. Death confirms the necessity for the insurance, but it cannot be the starting point for insurable interest in the process of obtaining coverage. Policy renewal relates to existing coverage, and delivery pertains to the completion of the insurance transaction. However, it is the application stage where the demonstration of insurable