What does it mean when policyholders have "insurable interest"?

When policyholders have "insurable interest," it means they have a legitimate financial stake in the life or well-being of the individual insured by the policy. Insurable interest is a fundamental principle in insurance that ensures that contracts are only made where the policyholder would suffer a loss if the insured were to pass away or experience a loss. This principle helps prevent insurance from being treated as a gambling tool and maintains the integrity of the insurance system. For instance, a spouse typically has an insurable interest in their partner's life as they share financial responsibilities, while a business owner has an insurable interest in key employees whose absence could affect the company's financial health.

The other choices do not accurately reflect the concept of insurable interest. Claiming policy benefits without limitations or choosing beneficiaries without restrictions would not align with the principles of insurable interest. Similarly, being able to purchase policies without criteria disregards the necessity that the policyholder must have a valid interest in the insured’s life to ensure that the insurance contract is enforceable and ethical.