What does “insurable interest” refer to?

“Insurable interest” is a fundamental principle in insurance that ensures the policyholder has a legitimate stake in the insured person’s life or health. This means that the policyholder must stand to suffer a financial loss or emotional distress if the insured person were to die or become ill. This principle is integral to preventing moral hazard, where individuals might otherwise take out insurance on someone else simply to gain financially from their misfortunes. By requiring insurable interest, the insurance industry maintains ethical standards and ensures that policies are used for their intended purpose of protection, rather than speculation.

The other choices touch on different aspects of insurance but do not accurately define insurable interest. The ability to pay premiums relates more to the financial responsibility of the policyholder, while eligibility for benefits is concerned with the terms of the insurance contract itself. The level of risk pertains to the assessment of the individual being insured, rather than the relationship between the policyholder and the insured. Thus, the concept of insurable interest specifically focuses on the legitimate interest the policyholder must have in the insured.