Maryland Life and Health Insurance License Practice Exam

In a life insurance scenario, which is a crucial factor that must be established by the applicant?

1. Coverage amount

2. Insurable interest

3. Policy duration

4. Beneficiary consent

The correct answer is: Insurable interest

In the context of life insurance, establishing insurable interest is essential for the validity of the contract. Insurable interest refers to the legal requirement that the policyholder must have a substantial interest in the life of the insured, meaning that the policyholder would experience financial loss or hardship if the insured were to pass away. This principle is rooted in the idea that insurance should protect against loss rather than serve as a gambling contract. Insurable interest typically must be present at the time the policy is issued, and it ensures that the policyholder has a legitimate reason for purchasing the insurance. This requirement helps to prevent moral hazard situations, where one might be motivated to cause harm to collect insurance benefits. Without insurable interest, an insurance policy could be deemed void, and claims could be denied. While factors like coverage amount, policy duration, and beneficiary consent are important in the context of life insurance, they do not have the same foundational legal significance as insurable interest. The absence of insurable interest undermines the purpose of life insurance and poses risks both to the insurer and the integrity of the insurance system.