What is required to purchase life insurance?

The requirement to have an insurable interest in the life of the insured is fundamental when purchasing life insurance. Insurable interest means that the policyholder stands to suffer a financial loss if the insured individual passes away. This concept is designed to prevent moral hazard and ensure that insurance contracts are used for legitimate risk management purposes rather than as speculative investments.

In practice, insurable interest exists in various relationships, such as between family members, business partners, or lenders and borrowers. For example, a spouse typically has an insurable interest in their partner because the death of one may result in financial hardship for the other. Similarly, a business might take out a policy on a key employee whose loss could impact the company's operations and profitability.

This requirement ensures that the policyholder is genuinely concerned about the well-being of the insured, which is crucial for maintaining the integrity of the insurance system and preventing abuse.