With respect to insurable interest in a life insurance policy, which statement is correct?

Why C is correct

In life insurance, the insurable interest must exist at the time the application is made. The policyowner must stand to suffer a genuine financial or emotional loss if the insured dies, such as a spouse, child, parent, or a business with a key employee. After the policy is issued, the insurable interest generally does not have to continue to exist for the beneficiary to collect, because the life insurance contract is a valued contract that pays its face amount rather than measuring an actual loss at the time of death.

Why the other options are wrong

• A) For life insurance the interest is tested at policy inception, not at death. A beneficiary can collect even if the relationship with the insured later changes or ends. In life insurance the interest is checked at inception, unlike property insurance where the interest must exist at the time of loss.
• B) Insuring a stranger's life with no relationship or expectation of loss is a wagering contract. Such contracts are not permitted because they lack a genuine insurable interest. Covering a stranger without any relationship is a wagering contract and is void as a matter of public policy.
• D) Insurable interest is required in both property and life insurance. Life policies require it at the time of application, while property policies require it at the time of loss. Both property and life insurance require insurable interest, but the timing of the requirement differs between the two lines.

Memory hook

Life insurable interest is a door check at application: it must exist when you walk in, not when you leave.