What does "insurable interest" mean in the context of life insurance?

In the context of life insurance, "insurable interest" refers to the requirement that the policyowner has a legitimate stake in the continuation of the insured's life. This means that the policyowner must expect to suffer a financial loss or incur liability if the insured were to pass away. The underlying principle ensures that life insurance is used for protection against risk, not as a gambling instrument where the policyowner could gain financially from the death of the insured without any legitimate interest.

This principle is critical because it aligns the motivations of the policyowner with the insurance company's risks. When a policyowner has insurable interest, it reinforces the ethical framework of insurance and prevents situations where individuals might be incentivized to bring about the insured's death for financial gain. While there are some relationships, like those between family members, that automatically imply insurable interest, it is fundamentally about the potential financial impact of the insured's death on the policyowner.