What is the insurance principle of insurable interest?

The insurance principle of insurable interest is fundamentally based on the concept that a policyholder must have a legitimate stake in the life or wellbeing of the individual covered by the policy. This principle ensures that the person buying the insurance policy has a valid reason to want the insured to live, thereby preventing moral hazard where individuals might otherwise benefit from the death or harm of another.

This requirement underpins the ethical and legal basis of insurance contracts, as it aligns the interests of the insurer and the insured. For example, parents have insurable interest in the lives of their children, as do spouses in each other's lives. This principle not only discourages insurance fraud but also affirms that policies are designed to mitigate genuine risk rather than provide a financial incentive for loss.

The other options do not accurately describe insurable interest. They either misrepresent the fundamental concept of insurance, such as suggesting obligations to cover all applicants or the necessity of profit for selling policies, or they reference aspects of insurance policies, such as cash value, that do not relate to the core idea of insurable interest.