What is the "insurable interest" requirement?

What is the "insurable interest" requirement?

• A. Policyholders must have a financial interest in the insurer
• B. It ensures policyholders are aware of the policy terms
• C. The policyholder must have a legitimate interest in the life of the insured
• D. It allows anyone to take out a policy on any individual

Answer: (C)

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.

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.