Washington Life Producer Practice Exam

Which of the following best describes the concept of "insurable interest" in life insurance?

1. Interest in property or assets

2. Financial interest in the life being insured

3. Negotiable interest in policy proceeds

4. Investment interest in future earnings

The correct answer is: Financial interest in the life being insured

The concept of "insurable interest" in life insurance is fundamentally based on the financial interest that one party has in the life of another individual being insured. Insurable interest ensures that the policyholder has a legitimate reason to insure the life of another—not simply for profit, but because they would suffer a financial loss or hardship if the insured were to pass away. This principle is critical in the insurance industry as it prevents moral hazard, where someone might deliberately cause the death of another just to collect on a policy. For example, a spouse typically has an insurable interest in their partner's life because their financial and emotional well-being is interconnected. Similarly, a business may have an insurable interest in a key employee whose death could significantly impact the company's operations. The other options suggest different types of interests that do not strictly relate to the condition required for insurable interest in life insurance. Interest in property or assets reflects property insurance principles, negotiable interest in policy proceeds pertains to the rights concerning the payouts, and investment interest in future earnings might apply to various financial agreements but does not encapsulate the core aspect of insurable interest in the context of life insurance. Therefore, the best description of insurable interest is indeed a financial interest in the life being insured