State RegulationsPA specificDifficulty 2/5
Two business partners own a company together, and each wants to buy life insurance on the other to fund a buy-sell agreement. Under 40 P.S. § 512, why does each partner have an insurable interest in the other's life?
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
40 P.S. § 512 conditions life insurance on the existence of an insurable interest: the person procuring the insurance must have a lawful and substantial economic interest in the continuation of the insured's life. Business partners who share ownership of an enterprise each suffer a financial loss if the other dies, so each qualifies. The interest must exist when the policy is obtained, which both partners satisfy here.
Why the other options are wrong
- A) Partnership status does not make the partners relatives; the interest arises from their financial stake, not from any family presumption.
- C) A signature on an application does not manufacture an insurable interest; the interest must be genuine and economic, not a paperwork artifact.
- D) The insurable interest belongs to the person insuring the life, not to the insurer; 40 P.S. § 512 runs against applicants and owners.
Memory hook
Partners bet on each other's pulse: shared business, shared insurable interest.