What does insurable interest refer to in life insurance?

Insurable interest in life insurance refers to the financial interest one person has in the continued life of another. This concept is crucial because it ensures that insurance is used to protect legitimate financial interests and prevents insurance from becoming a form of gambling. When someone takes out a life insurance policy on another individual, they must have a valid reason for doing so, such as a familial relationship or a financial investment, demonstrating that they would suffer a financial loss if that person were to pass away.

This principle safeguards the integrity of the insurance industry and helps prevent moral hazards, where individuals might otherwise be incentivized to harm someone for a payout. By requiring insurable interest, the policy ensures that the insured has a vested interest in the prolonged life of the insured and encourages responsible actions.