What does insurable interest refer to in life insurance?

Insurable interest in life insurance refers to having a financial interest in the life of the insured. This means that the policyholder must stand to incur a financial loss or detriment if the insured individual were to die. This principle is fundamental to the legality of life insurance contracts, ensuring that the purchase of insurance is motivated by legitimate concerns rather than speculative interests.

Thus, when someone has insurable interest, it typically signifies that the relationship goes beyond mere acquaintance; it often involves significant financial ties, such as those between business partners, spouses, or parents and children. This requirement protects the insurance industry from policies that could be seen as gambling on an individual's death.

The other choices do not fully capture the essence of insurable interest. A close familial relationship (the first choice) could imply emotional ties but does not inherently indicate a financial stake in the life of the insured. The legal requirement to purchase life insurance (the third choice) does not accurately reflect insurable interest; rather, insurable interest is a condition that must be met for the policy to be valid. Naming a beneficiary (the fourth choice) relates to the distribution of benefits upon death, but it does not define the financial stake that qualifies as insurable interest.