Which type of insurance requires the applicant to show insurable interest?

Life insurance specifically requires the applicant to demonstrate an insurable interest in the insured individual’s life. This means that the policyholder must have a legitimate concern for the continued existence of the person covered under the policy, typically due to a financial dependency or emotional relationship.

The rationale behind this requirement is to prevent moral hazards that could arise if individuals could take out life insurance policies on those with whom they have no significant ties or financial interest. By ensuring that an insurable interest exists, the insurance industry helps maintain ethical standards and mitigates potential for fraudulent claims.

In contrast, while health and property insurance and auto insurance also involve considerations of risk and financial responsibility, the specific need for an insurable interest is primarily a legal requirement in life insurance policies. For instance, in health insurance, the insured individual's own health status is what the policy directly relates to, and there is no insurable interest test in the same way. Similarly, property and auto insurance are focused on financial loss related to damage or theft, not on the life of an individual, thus they do not have the same stringent requirement for insurable interest that life insurance does.