South Carolina Life and Health Practice Exam

What indicates that an applicant has an insurable interest?

1. Personal relationship with the insured

2. Financial dependency on the insured's income

3. Potential for profit from the insured's success

4. Likelihood of needing healthcare coverage

The correct answer is: Personal relationship with the insured

An insurable interest arises when an individual has a legitimate interest in the life or health of another person, which typically involves a personal relationship. This means that the applicant has a vested interest in the wellbeing of the insured, as they would experience emotional or financial hardship in the event of the insured's loss. For example, a spouse or parent naturally has an insurable interest in the life of their loved one due to the emotional bond and potential financial implications of their loss. In contexts like life insurance, insurable interest is essential because it prevents insurance from being used as a wager or gambling tool. The principle behind insurable interest ensures that the policyholder is not merely seeking to profit from someone else's demise without any meaningful connection. This safeguard is crucial in maintaining the integrity of the insurance industry and ensuring that policies are issued based on genuine relationships rather than speculative motives. While other options may seem relevant, they do not directly establish the personal bond necessary to create insurable interest, which is fundamentally about the relationship between the parties involved.