Indiana State Life and Health Insurance Practice Exam

When must insurable interest be present for a life insurance policy to be valid?

1. When the insured dies

2. Within the incontestability period

3. When the application is made

4. Before the insured dies

The correct answer is: When the application is made

Insurable interest must be present when the application for a life insurance policy is made for the policy to be valid. This principle is foundational to the insurance industry, as insurable interest ensures that the policyholder has a legitimate reason to insure the life of another person, typically based on a close relationship or financial dependency. Having insurable interest at the time of application prevents insurance policies from being taken out on individuals with whom the policyholder has no connection, reducing the potential for moral hazard and fraud. It establishes that the policyholder would suffer a financial loss or hardship if the insured individual were to pass away, thus legitimizing the purpose of the insurance. While insurable interest is not required at the time of the insured's death or necessarily during the incontestability period, it must be present upfront, at the point of application. This means that for a life insurance contract to be enforceable, the applicant must show insurable interest initially, reinforcing the ethical and practical aspect of life insurance.