Arizona Life and Health Practice Exam

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

1. At the time of the application

2. Inception of the contract

3. At the time of claim

4. At the time of premium payment

The correct answer is: Inception of the contract

The concept of insurable interest is crucial in life insurance contracts, as it ensures that the person purchasing the policy has a legitimate interest in the continued life of the insured. For a life insurance contract to be valid, insurable interest must exist at the inception of the contract. This means that when the policy goes into effect, the policyholder must have a valid reason to insure the life of another, typically based on personal relationships (like family members) or financial stakes (like key employees). Insurable interest is designed to prevent moral hazard and insurance fraud by ensuring that individuals cannot profit from the death of someone with whom they have no meaningful relationship. If insurable interest is not present at the time the contract begins, the validity of the insurance could be questioned, potentially leading to legal issues in the event of a claim. Other moments—such as the time of application, time of claim, or time of premium payment—are not the definitive points at which insurable interest must be established for the policy to be enforceable. The requirement is that it must exist when the contract is formed, ultimately ensuring that the insurance transaction remains ethical and legitimate.