Tennessee Insurance Practice Exam

Which life insurance arrangement allows one to bypass insurable interest laws?

1. Traditional Whole Life Insurance

2. Term Life Insurance

3. Investor-Originated Life Insurance

4. Universal Life Insurance

The correct answer is: Investor-Originated Life Insurance

Investor-Originated Life Insurance (IOLI) is a life insurance arrangement that is structured to allow investors to purchase life insurance policies on individuals in which they have no insurable interest. This means that the investors are not required to have a direct financial relationship or connection with the insured individual, which typically would be necessary under insurable interest laws. In traditional insurance practices, insurable interest is a fundamental principle requiring that the policyholder has a financial stake in the life of the insured. IOLI circumvents this principle by enabling investors to take out life insurance policies on individuals solely for the potential benefit of a death benefit payout, rather than for a legitimate financial relationship. This practice has raised ethical concerns and regulatory scrutiny, but it highlights how certain arrangements can navigate around traditional insurance principles. The other types of life insurance mentioned, such as Traditional Whole Life, Term Life, and Universal Life, all operate within the established framework of insurable interest laws, emphasizing the need for a meaningful connection between the insured and the policyholder.