West Virginia State Life Insurance Practice Exam

What principle requires that the insured must have a financial interest in the insured person at the time of the insurance contract?

1. Beneficiary principle

2. Insurable interest principle

3. Adhesion principle

4. Risk principle

The correct answer is: Insurable interest principle

The principle requiring that the insured must have a financial interest in the insured person at the time of the insurance contract is known as the insurable interest principle. This principle is foundational in insurance, ensuring that individuals or entities purchasing insurance have a legitimate stake in the risk they are insuring. Having insurable interest means that the insured has something to lose in the event of a loss, such as financial loss, which legitimizes the insurance contract and discourages fraudulent claims. For instance, a person can insure their own life or the lives of their dependents because they have a financial connection—should they pass away, there would be a loss that affects them or their dependents. In contrast, concepts like the beneficiary principle focus on who receives the benefits from a policy rather than the necessity for an interest at the time of purchase, while adhesion relates to the nature of insurance contracts being take-it-or-leave-it agreements. The risk principle usually pertains to how risks are managed within the framework of insurance but does not address the necessity of having a financial interest at the outset of the contract.