What is necessary for insurable interest to exist in an insurance policy?

Insurable interest is a fundamental principle in insurance that ensures the policyholder has a legitimate interest in the continued life and well-being of the insured. For insurable interest to exist, the applicant must have a financial stake in the insured's survival; this means that the applicant would stand to suffer a financial loss if the insured were to die or become disabled.

This principle prevents insurance from becoming a gambling mechanism and ensures that policies are taken out for valid reasons, often related to protecting an investment or financial dependency. Therefore, if the applicant stands to lose value or sustain a financial detriment from the insured's death, it validates the insurance contract and minimizes the risk of moral hazard.

While having a family relationship may create a sense of insurable interest, it is not a requirement. Good health of the insured at the time of application relates more to underwriting and risk assessment rather than the existence of insurable interest. Ultimately, the critical factor is the financial loss that the applicant would incur from the insured’s demise.