An employee applies for life insurance on the life of her employer, who has consented to the coverage. Who must have an insurable interest in the employer for the policy to be valid?

Why A is correct

For a life insurance policy to be valid, the applicant and policyowner must have an insurable interest in the person whose life is insured. Here the employee owns the policy, so the employee must have an insurable interest in the employer's life. An employer-employee relationship generally provides such an interest, and the employer's consent makes the arrangement proper. California Insurance Code Section 10110 requires the insurable interest to exist at the time the policy is issued, protecting against wagering contracts on human life.

Why the other options are wrong

• B) The insured does not need to have an insurable interest in himself; it is the policyowner who must have an interest in the insured's life. The insured only supplies the life and consents; the insurable interest test is placed on the party who owns the coverage.
• C) The beneficiary does not have to hold an insurable interest; the requirement attaches to the policyowner, not to the party who will receive the proceeds. The proceeds recipient is not the contracting party, so no interest is required of the beneficiary.
• D) The insurer merely issues the policy; the insurable interest requirement protects against wagering and is tested on the applicant and policyowner, not the insurer. The insurer is the opposite party to the contract and is never the one whose interest is examined.

Memory hook

The policyowner is the one who must care about the insured's life, and that is insurable interest.