Texas Life Agent Practice Exam

Which of the following must exist when a life insurance policy is issued?

1. Consent of the insured

2. Insurable interest

3. A medical examination

4. Proof of income

The correct answer is: Insurable interest

The necessity for insurable interest in a life insurance policy is a fundamental principle in insurance underwriting. Insurable interest refers to the requirement that the policyholder must have a legitimate interest in the continued life of the insured. This requirement protects against moral hazard, which could arise if individuals could take out policies on anyone's life without any financial or emotional involvement. In practical terms, insurable interest ensures that someone purchasing a life insurance policy is either related to the insured, has a close personal relationship, or stands to suffer a financial loss upon the insured's death. Without this requirement, life insurance could be used for speculative purposes, where individuals might benefit financially from the premature death of others, ultimately leading to unethical behavior. The other options presented, while related to the context of life insurance, do not represent universal prerequisites that must exist for a policy to be issued. Consent of the insured might be relevant in some cases, but it is not always necessary in every scenario. A medical examination might be required depending on the insurer's underwriting guidelines but is not a mandated condition for all policies. Similarly, proof of income, while it might help to ascertain the need for certain types of insurance, is not a requirement for the issuance of a life insurance policy itself. Thus