What is insurable interest in the context of life insurance?

Insurable interest in the context of life insurance refers to a legitimate interest or stake that the policyholder has in the life of the insured individual. This requirement is fundamental to life insurance contracts to prevent moral hazard and to ensure that the relationship between the policyholder and the insured is one that justifies the purchase of insurance.

For instance, a person may have insurable interest in a family member whose death would result in a financial loss, or in a business partner whose passing would affect the business's viability. This concept helps to ensure that life insurance is used for legitimate purposes and that the policyholder is motivated to see the insured remain healthy and alive.

Other options do not correctly define insurable interest. The second option incorrectly suggests that any person can insure anyone else's life without having a legitimate interest, which would undermine the concept entirely. The third option limits the concept to financial dependents, neglecting other valid relationships where insurable interest exists. Lastly, the fourth option restricts insurable interest to close relatives, which is not sufficiently broad, as business partners or other key individuals can also create an insurable interest.