Certified Financial Consultant (CFC) Practice Exam

When must an insurable interest exist in a life insurance policy?

1. At any time during the policy's duration

2. At the time of claim submission

3. At the time of application

4. Only after the premium is paid

The correct answer is: At the time of application

An insurable interest must exist at the time of application for a life insurance policy. This requirement is fundamental to the validity and legality of the insurance contract. Insurable interest is a principle that ensures the person purchasing insurance has a legitimate reason for wanting the policy, typically because they would suffer a financial loss or hardship if the insured person were to pass away. This necessity is in place to prevent moral hazard and insurance fraud, which could occur if individuals were allowed to insure anything or anyone without a genuine stake in their well-being. By requiring insurable interest at the time of application, insurers can ensure that the policyholder has a vested interest in the continued life and health of the insured, establishing a more ethical framework for life insurance. The other options, such as the existence of insurable interest during the policy's duration, at the time of claim submission, or only after the premium is paid, would not align with this foundational principle, as they do not underscore the essential connection between the policyholder and the insured person when the contract is initiated.