Hawaii Insurance License Practice Exam

What determines the validity of an insurance contract?

1. The signer’s age

2. The presence of insurable interest

3. The payment of premiums

4. The type of coverage

The correct answer is: The presence of insurable interest

The validity of an insurance contract primarily hinges on the presence of insurable interest. Insurable interest refers to a stake in the preservation of property, life, or health. This principle ensures that the policyholder would suffer a financial loss if the insured event occurs, thus preventing insurance from becoming a means of gambling. Insurable interest must exist at the inception of the contract for it to be valid; without it, the contract could be deemed void from the start. While the other factors listed—signer’s age, payment of premiums, and type of coverage—are important in their own right, they do not singularly determine a contract's validity. For example, a minor may have the legal capacity to enter into certain types of insurance contracts, but the essence of validity lies within the existence of an insurable interest. Similarly, the payment of premiums is a requirement for the contract’s performance but does not, on its own, establish the legitimacy of the contract in the absence of insurable interest. Finally, the type of coverage can vary widely and does not inherently validate the contract. Thus, insurable interest is fundamental to the legitimacy and enforceability of any insurance agreement.