What is required for an insurable interest to exist when applying for life insurance?

The existence of an insurable interest is a fundamental requirement in life insurance applications, rooted in the principle that individuals can only take out insurance policies on lives for which they would suffer a financial loss or hardship should the insured individual pass away. This requirement protects insurance companies from potential moral hazards, where someone might otherwise take out a policy on an individual without any genuine interest or potential loss.

A valid reason to insure the life of another signifies that the policyholder has something at stake; this could include financial dependence, family ties, or any scenario where the death of the insured would result in a direct financial detriment to the policyholder. For instance, parents have an insurable interest in their children because they would face emotional and financial difficulties if the child were to die. Similarly, a business owner may have an insurable interest in key employees whose death could negatively impact the business.

Other considerations, such as a long-term relationship with the insured, while potentially relevant, do not alone establish an insurable interest without the financial implications. Similarly, while consent from the insured is an important ethical and legal aspect of placing a life insurance policy, it is not a prerequisite for establishing insurable interest. Finally, while insurable interest must be present at the start of