What does the term "insurable interest" mean in life insurance?

The term "insurable interest" in life insurance refers to the policyholder's legitimate interest in the insured's life. This concept is crucial because it ensures that the person purchasing the insurance has a valid reason to insure another individual’s life, typically based on a close relationship, such as family ties or financial dependency.

When an individual has insurable interest in another's life, this relationship provides a justifiable reason for the policyholder to benefit from the life insurance policy, thereby preventing immoral scenarios where an individual might take out a policy on someone they have no meaningful connection to, potentially leading to unethical motives. By requiring insurable interest, insurance companies protect themselves from moral hazards and ensure that their policies serve their intended purpose—providing financial security for those who are genuinely affected by the loss.

This distinction reinforces the importance of insurable interest in maintaining the integrity of the life insurance system and the ethical standards within the insurance industry.