PSI Ohio Insurance Practice Exam

When does insurable interest need to be established in a life insurance policy?

1. When the insured is a stranger to the applicant

2. When the applicant for the policy is not the insured

3. When the beneficiary is a minor

4. When the policy is reinstated after lapsing

The correct answer is: When the applicant for the policy is not the insured

Insurable interest in life insurance policies must be established at the time the application for the policy is made. This means that the applicant must have a legitimate interest in the continued life of the insured. In the context where the applicant is not the insured, it highlights the need for insurable interest to ensure that the applicant would suffer a financial loss or hardship upon the insured’s death. This principle is fundamental to prevent moral hazard, where someone could take out insurance on another individual without any legitimate relationship or concern for their well-being. The other contexts provided do not directly trigger the requirement for insurable interest. Just because the insured and applicant do not share a direct relationship or the beneficiary is a minor does not negate the established principles regarding insurable interest. Additionally, insurable interest does not need to be re-established simply because a policy is reinstated; it is sufficient that it was in place at the time of the original application. Thus, the focus on when the applicant is not the insured is crucial, as it clearly addresses the importance of establishing that financial connection and concern at the initiation of the policy.