Tennessee Insurance Practice Exam

What type of interest only needs to exist at the time of application for a life insurance policy?

1. Nominal interest

2. Insurable interest

3. Beneficiary interest

4. Conditional interest

The correct answer is: Insurable interest

The concept of insurable interest is fundamental in the realm of life insurance. It refers to the requirement that the policyholder must have a legitimate interest in the continued life of the insured at the time the policy is issued. This means that the policyholder would incur a financial loss or hardship if the insured were to pass away. Insurable interest only needs to exist when the application for the policy is submitted, not throughout the life of the policy. This principle helps prevent insurance from being used for wagering purposes and ensures that the insurance contract is valid and enforceable. In contrast, nominal interest pertains to the stated interest rate on a financial instrument, which is not specifically relevant to the application phase of a life insurance policy. Beneficiary interest relates to the rights of the person designated to receive benefits after the death of the insured but is not required at application. Conditional interest does not relate to the necessity of an insurable interest at the application stage. Thus, insurable interest is the correct type that aligns with the requirements of life insurance applications.