Maryland Life and Health Insurance License Practice Exam

Insurable interest is a key component of which element of an insurance contract?

1. Legal purpose

2. Consideration

3. Offer and acceptance

4. Competent parties

The correct answer is: Legal purpose

Insurable interest is fundamentally related to the legal purpose of an insurance contract. For an insurance policy to be valid, it must be established that there is a legitimate interest in the insured item or person. This legal requirement ensures that the parties involved have a valid reason to enter into the contract. When an individual purchases a life insurance policy on another person, they must demonstrate that they would suffer a financial loss or hardship if that person were to pass away. This concept prevents individuals from taking out insurance policies on someone without having a substantial connection, which could lead to unethical behavior, such as intentionally causing harm to the insured. In the context of legal purpose, insurable interest helps to uphold the integrity of insurance contracts by ensuring they serve their intended purpose: to protect individuals from financial loss while discouraging fraudulent behaviors. Consideration, offer and acceptance, and competent parties are essential elements of a contract but do not directly address the relationship between the contract and the legitimate financial interest in the insured entity.