New York Child Abuse Identification and Reporting Practice Exam

At what point does insurable interest become relevant in a life insurance policy?

1. When the insured and applicant are the same person

2. When the applicant is related to the insured

3. When the applicant is not the insured individual

4. When the insurance amount exceeds a certain limit

The correct answer is: When the applicant is not the insured individual

Insurable interest in a life insurance policy is a crucial concept that ensures that the applicant has a valid reason to insure the life of the insured individual. This means the applicant stands to suffer a financial loss or hardship if the insured were to pass away. The relevance of insurable interest arises specifically when the applicant is not the insured individual. In such cases, demonstrating insurable interest is essential for the policy to be deemed valid. If the applicant is not related to or does not have a financial or emotional stake in the life of the insured, the validity of the insurance contract could be questioned. Therefore, the importance of insurable interest is highlighted when the insured and the applicant are different people, ensuring that insurance fraud is avoided and that the parties involved possess a legitimate stake in the outcome of the insurance policy. The proximity in relationship between the applicant and the insured or the financial benefit derived from the insured's life is less relevant when they are the same person or when it is conventional for people to purchase life insurance for loved ones, making instances of insurable interest clear in those scenarios.