What does the concept of insurable interest refer to?

Insurable interest is a fundamental concept in insurance law that signifies a legitimate interest the policyholder has in the life of the insured. This principle is crucial because it establishes that the policyholder would suffer a financial loss or hardship if the insured individual were to pass away. The requirement for insurable interest is what differentiates insurance from gambling; it ensures that the policyholder has a valid reason to seek insurance coverage on someone's life.

For life insurance, insurable interest must typically exist at the time the policy is issued. This relationship can be based on various factors, such as familial ties or financial obligations, providing a basis for the policyholder's concern over the wellbeing of the insured individual. Thus, the concept not only plays a protective role in the insurance contract but also promotes ethical standards within insurance practices.

Understanding insurable interest is essential because it ensures that insurance serves its intended purpose of risk management rather than enabling profit from someone else's misfortune without any concern for their well-being.