An insurance contract may be unlawful if:
it is taken out by a child on the life of their parent.
the person taking out the policy does not have an insurable interest in the subject of the contract.
it is for an amount higher than the value of the person’s life that is the subject of the policy.
it is taken out by a person on a business partner.
The Correct Answer And Explanation is:
Correct Answer:
the person taking out the policy does not have an insurable interest in the subject of the contract.
Explanation:
An insurance contract may be deemed unlawful or void if the person who initiates the contract does not have an insurable interest in the subject matter of the policy at the time the contract is made. In insurance law, insurable interest is a foundational concept. It means that the policyholder must stand to suffer a direct financial loss or hardship if the insured event (such as death or damage) occurs.
For life insurance, this typically means the policyholder must have a close family relationship (like a spouse or child), a financial dependency, or a legal obligation to the insured. Without this, the contract can be considered speculative or akin to gambling, which is prohibited in most jurisdictions. This requirement protects against moral hazard—the risk that a person may wish harm upon the insured in order to collect insurance benefits.
Let’s examine the other options to understand why they are not the correct answers:
- “It is taken out by a child on the life of their parent”: This is generally lawful, as there is a presumed insurable interest due to the familial relationship, especially if the child is financially dependent on the parent.
- “It is for an amount higher than the value of the person’s life that is the subject of the policy”: While there are guidelines and underwriting practices to assess reasonable coverage amounts, this alone does not make a contract unlawful, unless there is intent to defraud.
- “It is taken out by a person on a business partner”: This can be lawful if there is an insurable interest, such as shared financial obligations or a buy-sell agreement in a business partnership.
Thus, lack of insurable interest is the only option that would inherently render an insurance contract unlawful.