Tennessee Insurance Practice Exam

Under what condition is a life insurance policy considered a wagering contract?

1. With insurable interest

2. Without insurable interest

3. With high premiums

4. Without a beneficiary

The correct answer is: Without insurable interest

A life insurance policy is regarded as a wagering contract when it is taken out without insurable interest. Insurable interest is a fundamental principle in insurance that dictates that the policyholder must have a legitimate interest in the life or health of the insured person, meaning they would suffer a financial loss or hardship upon that person’s death. When a policy is purchased without insurable interest, it introduces a speculative element to the arrangement, resembling more of a bet rather than a protective financial measure. This situation raises ethical concerns and diminishing trust within the insurance framework, as it allows individuals to benefit financially from the death of another without any genuine connection or potential loss. In scenarios involving high premiums, the focus is on the cost of the policy rather than the relationship between the insured and the policyholder, and this aspect does not inherently define the nature of the contract itself. Similarly, the presence or absence of a beneficiary does not determine whether the contract is a wager, but rather addresses who will receive the policy’s proceeds upon the insured's death. Hence, the essence of determining whether a life insurance policy is a wagering contract fundamentally hinges on the existence of insurable interest.