Tennessee Insurance Practice Exam

When third-party ownership is involved, applicants who are also the stated primary beneficiary must have what?

1. Affidavit of eligibility

2. Consent from the insured

3. Insurable interest in the proposed insured

4. Proof of income

The correct answer is: Insurable interest in the proposed insured

When third-party ownership is involved in an insurance policy, it is essential for the applicants who are also the stated primary beneficiaries to have insurable interest in the proposed insured. Insurable interest means that the beneficiary would suffer a financial loss if the insured were to die or become incapacitated. This requirement serves to prevent insurance policies from being purchased on individuals without a legitimate relationship, thereby avoiding moral hazard where someone might benefit from a death or loss they would not otherwise care about. In this context, having insurable interest ensures that there is a valid reason for the beneficiary to seek compensation from the insurance policy, reinforcing the purpose of insurance as a risk management tool rather than a financial gamble. Thus, this condition upholds ethical standards in the industry and protects the integrity of the insurance system.