What is the "insurable interest" requirement?

The "insurable interest" requirement is centered around the concept that a policyholder must have a legitimate interest in the life of the insured party. This means that the individual purchasing the life insurance policy must stand to suffer a genuine financial loss or hardship if the insured were to pass away. This requirement is essential in preventing moral hazard, which could arise if individuals were allowed to insure lives without a vested interest, thereby possibly incentivizing them to cause harm.

This principle helps ensure that insurance is used for its intended purpose: to provide financial protection against loss due to death and not as a means for speculative gain. Thus, the existence of insurable interest is a fundamental criterion in the life insurance underwriting process. It assures both the insurer and the insurability of the policy, maintaining the integrity of the insurance industry.