Insurable Interest: The Rule That Makes Insurance Legal (LLQP)
Insurable interest is the legal requirement that the person buying a life insurance policy would suffer a genuine financial or emotional loss if the insured person died. Without it, the policy is void — insurance would otherwise be a bet on someone's death.
Why it matters on the LLQP exam
Insurable interest is one of the foundational legal principles in both the Ethics and Life Insurance modules. The rules to memorize:
- Your own life — unlimited insurable interest. Anyone can insure themselves for any amount an insurer will underwrite.
- Family relationships — spouses have insurable interest in each other; parents in their children; a child in a parent they depend on. Close family ties generally qualify.
- Business relationships — an employer in a key employee, a business in a partner (buy-sell funding), a lender in a borrower up to the debt owed.
- Consent matters — when you insure someone else's life, that person must consent in writing (a parent insuring a minor child is the usual exception).
The critical timing rule, and the exam's favourite trap: insurable interest must exist only at the time the policy is issued, not at the time of the claim. A divorced spouse can keep a policy they took out on their ex while married — and can collect at death, because insurable interest existed at issue.
Contrast this with property insurance, where interest must exist at the time of loss. Mixing these up costs marks.
Example question
Insurable interest in a life insurance contract must exist:
- At the time of the insured's death
- Continuously throughout the life of the policy
- At the time the policy is applied for and issued
- Whenever premiums are paid
Answer: C — life insurance requires insurable interest only at inception; it need not exist when the claim is paid.
This principle sits alongside utmost good faith and void vs voidable contracts in the ethics hub.