West Virginia State Life Insurance Practice Exam

Which of the following is NOT a requirement for a valid insurance contract?

1. Agreement between parties

2. Competent parties

3. Minimal financial risk

4. Legal purpose

The correct answer is: Minimal financial risk

In order for an insurance contract to be valid, several key elements must be present. One of the essential elements is the presence of an agreement between the parties, which encompasses the terms and conditions that both the insurer and the insured must adhere to. Competent parties is fundamental, as it ensures that both parties entering the contract have the legal capacity to do so, meaning they are of legal age and sound mind. Additionally, the contract must have a legal purpose; it cannot be created for illegal activities or against public policy. However, minimal financial risk is not a requirement for a contract to be considered valid. While risk is a central concept in insurance, a valid insurance contract does not necessarily hinge on whether the risk is minimal. Instead, insurance contracts often deal with significant amounts of risk, and their purpose is to manage and transfer that risk rather than eliminate it entirely. As a result, minimal financial risk does not meet the criteria necessary for an insurance contract's validity.