Why is insurable interest essential in life insurance?

Why is insurable interest essential in life insurance?

• A. It prevents insurance fraud by requiring a relationship
• B. It ensures higher payouts for beneficiaries
• C. It limits the number of policies one can purchase
• D. It eliminates the need for beneficiary changes

Answer: (A)

Insurable interest is fundamental in life insurance because it establishes a legitimate reason for a person to insure another's life, thus preventing potential fraud. Insurable interest exists when the policyholder has a significant relationship with the insured—such as a familial bond, a financial connection, or a vested interest in the insured's well-being. This requirement helps ensure that individuals do not take out policies on the lives of strangers without any valid connection, which could lead to morally and ethically questionable situations. By enforcing this concept, the insurance industry safeguards against individuals potentially profiting from the death of someone they have no legitimate interest in, ensuring that insurance remains a beneficial tool for risk management rather than a means for exploitation.

Insurable interest is fundamental in life insurance because it establishes a legitimate reason for a person to insure another's life, thus preventing potential fraud. Insurable interest exists when the policyholder has a significant relationship with the insured—such as a familial bond, a financial connection, or a vested interest in the insured's well-being. This requirement helps ensure that individuals do not take out policies on the lives of strangers without any valid connection, which could lead to morally and ethically questionable situations. By enforcing this concept, the insurance industry safeguards against individuals potentially profiting from the death of someone they have no legitimate interest in, ensuring that insurance remains a beneficial tool for risk management rather than a means for exploitation.