What is the purpose of establishing an insurable interest in a life insurance policy?

The purpose of establishing an insurable interest in a life insurance policy is to ensure a legitimate financial interest exists between the policyholder and the insured. Insurable interest serves as a foundational legal principle in insurance, which means that the policyholder must have a valid interest in the continued life of the insured. This requirement helps prevent insurance from being used as a gambling mechanism or to create policies on individuals with no meaningful relationship.

For instance, if one were to take out a life insurance policy on a stranger, it could lead to unethical situations where the policyholder may have an incentive for harm to come to the insured. Insurable interest protects against these scenarios by requiring that the policyholder has a vested financial interest in the well-being of the individual covered by the policy, such as a spouse, child, or business partner.