North Carolina Life Agent Practice Exam 2025 – Comprehensive Test Prep

Having an insurable interest is a fundamental requirement for a life insurance policy. This means that the policyholder must have a legitimate concern for the continued life or well-being of the insured, typically established through relationships such as family ties or economic connections.

When insurable interest is not present, the policy may be deemed invalid. This is because life insurance is designed to provide a financial safety net for those who would suffer financially from the death of the insured. Without insurable interest, there is a risk of moral hazard; that is, the policyholder might have an incentive to risk the life of the insured for financial gain. Therefore, the insurance company requires insurable interest to ensure that the contract is ethically and legally valid.

The other options do not accurately reflect the consequences of lacking insurable interest. The premium's cost is determined by other risk factors and underwriting criteria, and not having insurable interest does not inherently affect the payout amount. Additionally, the policyholder does not automatically lose all benefits or coverages simply due to the absence of insurable interest; the policy itself could be rendered void altogether, rather than merely losing advantages or benefits. Thus, invalidating the policy is the most appropriate outcome.