A creditor takes out a life insurance policy on a debtor. The debtor later repays the loan in full, but the creditor keeps the policy in force and continues paying premiums. If the debtor subsequently dies, the creditor:

Why A is correct

In life insurance, insurable interest must exist between the policyowner and the insured at the inception of the policy; it does not have to continue until death. A creditor has an insurable interest in a debtor's life under CIC Section 10110 because the debtor is under a legal obligation to pay money. Once the policy is validly issued, repayment of the debt does not destroy the contract. The creditor, as policyowner, remains entitled to the full death benefit even though the underlying debt is gone, which is a well-established rule in life insurance law.

Why the other options are wrong

• B) Satisfying the debt ends the economic relationship that originally supported the insurable interest, but it does not retroactively invalidate the policy that was lawfully issued. The creditor remains the owner of a valid contract and may continue coverage on its own initiative.
• C) There is no statutory rule that limits the payable death benefit to the amount of the original loan. Once the policy is issued for a stated face amount, the full face amount is payable under the contract even though the underlying debt has been repaid.
• D) The creditor, as the policyowner and beneficiary, is not required to obtain the debtor's written permission either to keep the policy in force or to collect the death benefit. The debtor's cooperation was needed only for the original issuance of the policy.

Memory hook

Check insurable interest once at issue; the check is not repeated at death.