A California policyowner purchases a policy on her own life and names a person who has no relationship to her as the beneficiary. Which statement is correct?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Every person has an unlimited insurable interest in his or her own life, so a policyowner may insure her own life and name virtually anyone as the beneficiary. The beneficiary is not required to have an insurable interest in the insured. California Insurance Code Section 10110 requires an insurable interest on the part of the party taking out the policy in the insured's life - and a person insuring her own life satisfies that requirement automatically. A contract is invalid as a wagering arrangement only when a third party buys insurance on another's life without any insurable interest.
Why the other options are wrong
- B) The beneficiary need not hold an insurable interest. The owner's interest in her own life satisfies the requirement, and the beneficiary simply receives the proceeds at death.
- C) California law does not restrict beneficiaries to family members. Any individual or entity, including a charity or an unrelated person, may be named as beneficiary.
- D) Who pays the premiums affects ownership and gift considerations, not the validity of the beneficiary designation. A third party may pay premiums without affecting the designation's validity.
Memory hook
Insure your own life, name anyone; the beneficiary needs no interest at all.