New York Child Abuse Identification and Reporting Practice Exam

What is the primary function of insurable interest in insurance applications?

1. To ensure the applicant's financial stability

2. To prevent insurance fraud

3. To mandate health screenings

4. To ensure policy benefits are exempt from tax

The correct answer is: To prevent insurance fraud

The primary function of insurable interest in insurance applications is to prevent insurance fraud. Insurable interest is a fundamental principle in insurance that requires the policyholder to have a legitimate interest in the life or property they are insuring. This means the applicant must stand to suffer a financial loss if the insured event occurs, such as in the case of a life insurance policy covering a family member or a homeowner's insurance policy covering a property. By establishing insurable interest, insurance companies can limit the risk of moral hazard where individuals might intentionally cause a loss for financial gain. Without this requirement, individuals could purchase policies for assets or lives in which they have no genuine interest, leading to potential abuse of the system. Insurable interest thus acts as a safeguard against fraudulent claims and ensures that policies are used for their intended protective purposes rather than as gambling instruments. The other choices may touch on aspects related to insurance, but they do not directly address the critical role that insurable interest plays in maintaining the integrity and trustworthiness of the insurance system.