Which of the following best describes insurable interest in life insurance?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Insurable interest in life insurance exists when the policyowner stands to suffer a financial loss or emotional harm from the insured's death, or reasonably expects to benefit from the insured's continued life. Close family relationships, such as spouse and parent-child, create the interest through presumed love and affection, while business and creditor relationships create it through economic exposure. California Insurance Code Section 10110 codifies the requirement for life policies. The interest is measured at the time the policy is issued, which is the key distinction from property insurance, where insurable interest must also exist at the time of loss.
Why the other options are wrong
- B) Ownership of a policy is a contract right held by the policyowner; it does not amount to an equity stake in the insurance company. Insurable interest instead concerns the relationship between the policyowner and the insured's life and the loss that death would cause.
- C) Cash value rights arise from specific policy provisions and belong exclusively to the policyowner. They have nothing to do with the definition of insurable interest, which addresses whether the owner may legally insure the life in the first place.
- D) The insured's consent to a beneficiary designation may be requested during underwriting, but insurable interest is created by the relationship or the economic expectation between the owner and the insured, not by any consent document.
Memory hook
Skin in the game on a life, love or money, is checked at the policy door.