Under California law (CIC §10110), when must an insurable interest exist for a life insurance policy to be valid?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
In life insurance, insurable interest must exist at the time the policy is applied for or issued; it need not exist at the time of death. This is why a creditor can insure a debtor or an employer can insure an employee, and why coverage may continue even if the relationship later ends. California's CIC §10110 requires anyone applying for life insurance to have an insurable interest in the insured's life at inception; otherwise the contract could be considered a wagering agreement. After inception, the owner may keep the policy even if the interest disappears, such as after a divorce.
Why the other options are wrong
- B) Requiring interest at death is the rule for property insurance under the indemnity principle, not life insurance; life interest is tested at application.
- C) Life insurance does not require continuous insurable interest; the interest need only exist when coverage begins.
- D) A close relative is not the only acceptable interest; creditors, business partners, and employers may also have an insurable interest in a life.
Memory hook
Life interest = checked at the door when you apply. Once issued, it is yours to keep.