Tennessee Insurance Practice Exam

What does the term "insurable interest" refer to in life insurance?

1. A financial stake in the death benefits

2. A legal requirement for policyholders

3. A promise made by the insurer

4. A condition of policy renewal

The correct answer is: A financial stake in the death benefits

The term "insurable interest" in life insurance refers to having a financial or emotional stake in the life of the insured person. This means that the policyholder must stand to suffer a financial loss or hardship from the death of the insured. Essentially, the concept ensures that insurance is not used as a betting tool on someone's death, as it is fundamentally meant to protect against loss. In life insurance, insurable interest often exists when the insured is a family member, business partner, or someone with a close relationship to the policyholder, highlighting the emotional or financial dependency on that person. This requirement acts as a safeguard against moral hazard, where a person would otherwise have an incentive for the insured to die. The other options mention various aspects related to insurance policies, but they do not capture the essence of insurable interest as it specifically pertains to the relationship between the policyholder and the insured in terms of financial stakes involved with life insurance contracts.