Rhode Island Pre-Licensing Life & Health Insurance Test 2025 – 400 Free Practice Questions to Pass the Exam

When third-party ownership is involved in a life insurance policy, it is essential that the applicants who are also the stated primary beneficiaries demonstrate an insurable interest in the proposed insured. Insurable interest means that the applicant has a legitimate interest in the continued life of the insured, which could be motivated by reasons such as family ties, financial support, or business relationships. This requirement protects against potential moral hazards and abuses of the insurance system, ensuring that the beneficiary is genuinely affected by the insured's death.

For instance, if a business partner takes out a policy on the life of another partner, the business partner has an insurable interest due to the financial impact of losing that partner. This principle reinforces the ethical foundation of life insurance, promoting responsible ownership and helping to ensure that insurance is used as it is intended—to provide financial protection rather than serve as a speculative tool.

The other options do not align with the regulatory requirement of demonstrating insurable interest or apply incorrect stipulations that do not reflect the legal structure of a life insurance policy when third-party ownership is involved.