What is an 'insurable interest' requirement?

The 'insurable interest' requirement is a legal concept that mandates that the policyholder must have a legitimate interest in the life or health of the insured party. This requirement serves an essential purpose in the insurance industry as it prevents individuals from taking out life insurance policies on anyone they wish, without any real connection or stake in that person's life or health.

By requiring insurable interest, the law ensures that insurance policies are used for risk protection rather than as speculative tools or gambling arrangements. This principle is vital for maintaining the integrity of insurance practices, as it fosters trust between the insurer and the insured and helps to prevent potential abuses that could arise if anyone could insure anyone else's life indiscriminately. For example, in life insurance, an individual must typically establish that they have a close relationship with the person to be insured, such as a family member or business partner.

This requirement aligns with ethical standards and helps to ensure that insurance serves its intended role in risk management and financial protection.