The basics of life insurance (insurable interest, underwriting, the application, policy delivery and how needs are figured) are covered in the national Life Insurance Basics guide. This guide covers New Jersey's insurable interest statute (N.J.S.A. 17B:24-1.1) and how New Jersey treats application statements.

Who has an insurable interest

Under N.J.S.A. 17B:24-1.1a, an insurable interest exists in:

• Your own life, health and bodily safety.
• People whose continued life benefits you financially: someone in whose life you have an expectation of financial advantage, so that their death or disability would cause you a loss (N.J.S.A. 17B:24-1.1a(2)).
• Close relatives: a person closely related by blood or law, where the policyowner has a substantial interest based on love and affection.
• People you support: a person liable to support a child or former spouse may insure that child or former spouse.
• Business relationships: a corporation has an insurable interest in its directors, officers, employees and others whose death or disability could cause it financial loss.
• Charities: a charitable organization has an insurable interest in its directors, officers and supporters, for example someone who signs an application naming the charity as owner and irrevocable beneficiary (N.J.S.A. 17B:24-1.1a(5)).

When insurable interest must exist

• Insurable interest must exist when the policy is applied for and issued. It doesn't have to exist at the insured's death (N.J.S.A. 17B:24-1.1b).
• When someone insures another person's life, the benefits must be payable to the insured, the insured's personal representative, or someone who had an insurable interest when the contract was made.
• Stranger-originated life insurance (STOLI), where investors with no insurable interest arrange a policy on someone's life, fails this test.

Statements in the application

• In the absence of fraud, statements in a life application are representations, not warranties. The policy and the attached application form the entire contract (N.J.S.A. 17B:25-5).

Viatical settlements

New Jersey's viatical settlements law (N.J.S.A. 17B:30B) defines chronically ill as unable to perform at least two activities of daily living, needing substantial supervision because of severe cognitive impairment, or having a similar level of disability (N.J.S.A. 17B:30B-2). It prohibits describing a settlement as "guaranteed," "fully secured" or "backed by state guaranty funds" (N.J.S.A. 17B:30B-11d(1)).

Common exam traps

• Timing: insurable interest is needed at application and issue, not at death.
• Love and affection creates insurable interest only for people closely related by blood or law.
• An employer may insure key people because their death could cause it financial loss.
• A charity can be owner and irrevocable beneficiary on a supporter's life.
• Application answers are representations, not warranties, unless there was fraud.