What is the purpose of requiring insurable interest in life insurance?

The requirement for insurable interest in life insurance serves as a crucial measure designed to prevent fraud and abuse within the insurance industry. Insurable interest refers to the necessity for the policyholder to have a legitimate interest in the continued life and well-being of the insured party. This principle helps ensure that individuals do not take out insurance policies on others without a valid reason to do so, as such actions could lead to moral hazard and encourage potential beneficiaries to cause harm to the insured for financial gain.

In practice, insurable interest must exist at the time the policy is purchased and typically involves relationships such as those between family members, business partners, or individuals who hold financial stakes in one another. By mandating that a financial or emotional investment exists in the person being insured, the insurance industry helps uphold ethical standards, promoting responsible use of life insurance coverage and reducing the risk of fraudulent claims.

The other options do not accurately reflect the primary aim of requiring insurable interest in life insurance. For instance, while insurable interest might indirectly affect premium pricing, that is not its main purpose. Similarly, claims do not become more difficult to prove due to the existence of insurable interest; instead, it serves to clarify the relationship and vested interest of the parties involved