What could happen if a policyholder fails to demonstrate insurable interest?

When a policyholder fails to demonstrate insurable interest, the implications are significant regarding the validity of the insurance policy. Insurable interest refers to the requirement that the policyholder has a legitimate interest in the insured person's life or property—typically, this means that the policyholder would suffer a financial loss or hardship if the insured were to die or experience a loss.

If this requirement is not met, the policy may be deemed null and void because insurance contracts are based on the premise that they protect against risks in which the policyholder has a financial stake. Without this foundational element, the insurance company's obligation to pay out on a claim is undermined, as the policy could be abused for speculative purposes or gambling on the risk.

Therefore, if a policyholder cannot establish insurable interest when applying for or maintaining an insurance policy, the policy would not hold validity, leading to its potential nullification. The other options do not accurately capture the legal and contractual ramifications that arise in such situations.