New York Child Abuse Identification and Reporting Practice Exam

Under which situation must insurable interest exist between the applicant and insured at the time of application?

1. When the insured is a minor

2. When the applicant is naming themselves beneficiary

3. When a third-party applicant names themselves beneficiary

4. When there is a family relationship

The correct answer is: When a third-party applicant names themselves beneficiary

Insurable interest is a fundamental concept in insurance that requires the policyholder to have a legitimate interest in the life or property being insured at the time the policy is taken out. This protects against moral hazard and ensures that insurance serves its intended purpose rather than being a gambling mechanism. When a third-party applicant names themselves as the beneficiary, insurable interest must exist because the applicant may not have a direct stake in the insured person's life or well-being unless a meaningful relationship exists. This is applicable to situations where individuals may attempt to collect benefits from the insurance policy without a true financial or emotional interest in the insured. The requirement of insurable interest aims to prevent individuals from taking out policies on people with whom they have no close connection, reducing the risk of fraudulent claims. Thus, for a third-party beneficiary, it becomes essential to demonstrate insurable interest at the time of application to validate the legitimacy of the insurance contract. Other scenarios, such as when the insured is a minor or when there is a family relationship, may involve different considerations regarding insurable interest. These do not necessarily match the same level of scrutiny regarding the need for insurable interest between a third-party applicant and the insured.