What does "insurable interest" refer to in life insurance?

• A. A financial stake in the life of the insured
• B. The payout amount established by the policy
• C. The requirement to have multiple beneficiaries
• D. A clause for accidental death coverage

Answer: (A)

Insurable interest is a fundamental concept in life insurance that refers to the necessity of a financial stake in the life of the insured. In order for a life insurance policy to be valid, the policyholder must demonstrate that they have a legitimate interest in the life of the individual covered by the policy. This could come from various relationships, such as familial, financial, or emotional connections, where the policyholder would experience a financial loss upon the death of the insured.

The rationale behind requiring insurable interest is to prevent moral hazard and ensure that insurance is used as a protective measure rather than a speculative investment. Without this requirement, individuals could potentially purchase policies on anyone’s life without a genuine concern for their well-being, leading to unethical incentives.

The remaining options do not accurately reflect the concept of insurable interest. The payout amount established by the policy pertains to the benefits and is not directly related to insurable interest. Similarly, having multiple beneficiaries is about policy structure rather than the underlying necessity of insurable interest. Lastly, a clause for accidental death coverage refers to specific conditions under which benefits would be paid, which is again unrelated to the requirement of having an insurable interest.