What is meant by "insurable interest" in life insurance?

"Insurable interest" refers to a financial interest that one party has in the life of another person. This concept is crucial in the field of life insurance because it establishes the legitimacy of the policyholder's investment in the insured's life. To have an insurable interest, the policyholder must demonstrate that they would suffer a financial loss or hardship if the insured individual were to pass away.

For example, a spouse has an insurable interest in their partner, as their partner's death would likely have significant financial implications. Similarly, a company has insurable interests in its key employees, whose loss could negatively affect the business.

Other options—such as emotional bonds, health conditions, or the age of the insured—do not directly represent the financial risk or potential loss associated with the insured individual’s death. While emotional bonds may affect someone’s desire to purchase life insurance, they do not fulfill the legal or financial requirement of insurable interest. Health conditions and age might influence the insurability of an individual but are unrelated to the concept of insurable interest itself.