AD Banker Life Insurance Practice Exam

To add a nonfamily member to a life insurance policy under a term rider, insurable interest is essential. Insurable interest is a foundational concept in insurance that ensures the policyholder has a legitimate interest in the continued life of the insured party. This means that the policyholder would suffer a financial loss or hardship if the person being insured were to pass away. For nonfamily members, establishing this insurable interest is crucial, as it prevents moral hazard where someone might take out a policy on a stranger without any real concern for their well-being.

While other factors might come into play in a broader context, insurable interest specifically addresses the legal and ethical basis for taking out a life insurance policy on someone who is not a family member. This requirement is rooted in the principle that insurance is not a gambling contract and serves to ensure that the policyholder has a vested interest in the life of the insured.