PSI Ohio Insurance Practice Exam

Under which situation must insurable interest exist between the applicant and insured at the time of application?

1. When the applicant is the insured.

2. When a third-party applicant names themselves beneficiary.

3. When the applicant is a family member.

4. When the applicant has a business relationship with the insured.

The correct answer is: When a third-party applicant names themselves beneficiary.

The requirement for insurable interest is a fundamental principle in insurance that protects the integrity of contracts. Insurable interest must be present at the time of application to prevent moral hazard and ensure that the applicant will benefit from the insurance policy only in the event of a legitimate loss. When an applicant names themselves as the beneficiary, it indicates that they have a financial stake in the insured’s life or well-being. This creates a situation where the applicant has an interest in the existence of the insured, as their potential financial gain would only arise if a loss occurred. This aligns with the principle of insurable interest, ensuring that the beneficiary has a legitimate reason to seek compensation if a loss occurs. In contrast, while other options involve various relationships, they do not inherently require that insurable interest exists at the application stage in the same way that naming oneself as a beneficiary does. For instance, an applicant may be related to the insured, but without direct financial consequences to themselves upon the insured’s loss, insurable interest may be less clearly established. Similarly, a business relationship must also demonstrate a tangible financial connection to meet the insurable interest requirement, which may not always be the case. Thus, the relationship of a third-party applicant naming themselves as beneficiary distinctly