Pearson VUE Life Insurance Practice Exam 2025 - Free Life Insurance Practice Questions and Answers.

Insurable interest is a fundamental principle in insurance that requires the policyholder to have a financial stake in the life or wellbeing of the insured. This means that the policyholder would suffer a financial loss if the insured were to pass away or suffer a loss, thus creating a legitimate interest in the insurance policy. This principle is designed to prevent moral hazard and ensure that insurance is used for its intended purpose—providing financial protection against loss rather than as a means for speculative gain.

Having a financial stake establishes a valid reason for purchasing the insurance, which is crucial for ethical underwriting practices. If policyholders did not have a financial interest, they might be motivated to cause harm to the insured in order to benefit financially from the policy, which would undermine the integrity of the insurance system.

While personal connections may enhance the relationship between the policyholder and the insured, or knowing the insured personally might create a sense of responsibility or care, these factors alone do not fulfill the requirement of insurable interest. Additionally, being a family member may indicate a connection or emotional bond, but without a financial stake, it does not fulfill the essential criteria that govern the validity of an insurance policy.