South Carolina Insurance Practice Exam

Which statement about insurable interest in a life insurance contract is NOT true?

1. It must exist at the time of application for insurance

2. Insurable interest can be established by financial dependency

3. Insurable interest can be established sufficiently by sentimental attachment alone

4. It is necessary to enforce the contract in case of a claim

The correct answer is: Insurable interest can be established sufficiently by sentimental attachment alone

In a life insurance contract, insurable interest is a fundamental principle that requires the policyholder to have a legitimate interest in the life of the insured person at the time of the contract's initiation. To clarify why the assertion about sentimental attachment alone is not true, insurable interest must be established through financial dependency or some lawful interest, rather than emotional or sentimental reasons. Financial dependency denotes a tangible relationship where the insured would have a direct economic impact on the policyholder's financial situation in the event of death. For instance, parents have insurable interest in their children due to their financial support obligations, or spouses have insurable interest due to shared financial resources and obligations. Furthermore, the necessity of having insurable interest at the time of application aligns with the requirement that it must be effective in enforcing the contract should a claim arise, confirming the contract's legitimacy and preventing insurance fraud. Without a valid insurable interest based on financial or lawful dependencies, merely having a sentimental attachment does not satisfy the legal requirements for establishing a binding contract in life insurance.