AD Banker Comprehensive Practice Exam

When an applicant for life insurance faces potential financial loss in the event of injury or sickness of an insured, it is said the applicant has:

1. Beneficiary status

2. Incidents of ownership

3. Indemnity rights

4. Insurable interest

The correct answer is: Insurable interest

The correct answer is insurable interest. This concept is fundamental in insurance, particularly life insurance, as it ensures that the applicant has a legitimate interest in the preservation of the insured's life. Insurable interest exists when the applicant would suffer a financial loss or hardship upon the insured's death or disability. This principle helps prevent moral hazard and fraudulent claims, as it requires a tangible relationship between the applicant and the insured. In the context of life insurance, insurable interest typically exists between individuals who have close personal, financial, or legal relationships, such as family members, business partners, or those with a financial obligation to one another. For example, a spouse typically has insurable interest in their partner's life because they would face financial hardship in the event of that partner's death. The other concepts do not directly address the relationship of financial loss in the same manner. Beneficiary status relates to who receives the death benefit, incidents of ownership refer to the rights the policyholder has in the policy itself, and indemnity rights deal with compensating for loss, primarily in property insurance, not life insurance. Thus, understanding insurable interest is crucial for both the ethical and operational framework of insurance policies.