What is the purpose of an insurable interest?

The concept of insurable interest is fundamentally linked to the legitimacy of insurance contracts. Its primary purpose is to establish that the policyholder has a valid interest in the life or well-being of the insured person at the time the insurance policy is issued. This requirement prevents moral hazard situations where an individual might benefit from the death or injury of another without having a genuine relationship or connection, which could lead to unethical behavior.

For instance, a person who has a financial stake in another person’s life—like a business partner, spouse, or family member—has a clear insurable interest that justifies the issuance of a life insurance policy. This requirement protects both the insurer and the integrity of the insurance system, ensuring that insurance remains a tool for risk management rather than for gambling or speculative purposes.

While verifying the relationship of the policyholder to the insured is important, it is a secondary consideration that supports the primary purpose of ensuring a legitimate interest. Additionally, affordability of premiums and modifying coverage terms relate to policy management rather than the fundamental ethics of insurable interest. Thus, the third option captures the essence of why insurable interest is essential in the context of life insurance policies.