Explain the term “insurable interest.”

The term "insurable interest" refers to a fundamental principle in insurance that ensures a policyholder has a legitimate stake or financial interest in the life or property being insured. This means that the individual taking out the insurance policy must stand to suffer a financial loss or some sort of detriment if an insured event occurs, such as the death of an individual whose life is covered by the policy.

For life insurance, insurable interest typically exists between family members, partners in a business, or financial beneficiaries. This requirement prevents insurance from being a form of gambling or speculative investment; rather, it anchors the contractual relationship based on a real and measurable relationship or financial connection to the insured.

The presence of insurable interest is crucial to the validity of an insurance contract, as it supports the ethical foundation of insurance practices and protects both the insurer and insured from fraudulent claims.