What is the principle of insurable interest?

The principle of insurable interest requires that the policyholder has a legitimate interest in the life of the insured individual. This principle is foundational in insurance as it helps to prevent moral hazard and fraud. If a person stands to gain financially from the death or disability of another, they might have an incentive to cause harm to that person; thus, the requirement of insurable interest acts as a safeguard against such unethical behavior.

Insurable interest is typically required at the time the insurance policy is purchased and must exist at the time of the insured event. For individuals, this goes beyond mere emotional connections to encompass familial relationships, financial dependencies, or other substantial, legitimate stakes in the insured's well-being. By ensuring that policyholders have a valid reason for insuring another person's life, insurance companies can promote fairness and ethical conduct in their operations.

The other options do not accurately reflect the concept of insurable interest. They discuss different aspects of insurance practices but do not address the fundamental requirement of having a legitimate interest in the life or health of the insured individual, which is critical for the enforcement and legality of insurance contracts.