What is the concept of insurable interest?

Insurable interest is a fundamental principle in insurance that requires the policyholder to have a legitimate financial interest in the life or health of the insured person. This means that the policyholder stands to suffer a financial loss or hardship if the insured individual were to die or experience a significant event affecting their health. This requirement is critical as it helps prevent moral hazard where someone could be tempted to cause harm to the insured person to benefit financially.

For example, a spouse typically has insurable interest in the life of their partner since the death of one could result in significant financial losses due to lost income and shared responsibilities. Similarly, a business partner has an insurable interest in the life of a business associate due to the potential adverse impact that partner's death could have on the business.

The other options do not accurately capture the essence of insurable interest. Limiting policies to specific age groups does not align with the concept. The general principle of all insurance agreements is broader and does not specifically address the need for financial stakes. A clause allowing claims without proof of loss pertains to claims processing and not the foundational requirement of insurable interest. Therefore, the definition that emphasizes the need for a financial stake in the life of the insured is the correct understanding of insurable interest