What is the purpose of the insurable interest requirement in life insurance?

The insurable interest requirement is fundamentally about ensuring that a policyholder has a genuine stake in the life being insured. This means that the policyholder would face financial or emotional hardship if the insured individual were to pass away. By establishing this requirement, the insurance industry aims to prevent fraudulent activities, where individuals might take out policies on others solely for the financial gain that would come from a claim.

If there were no insurable interest, it could lead to situations where someone might intentionally cause harm to another person to collect the insurance payout. Such scenarios represent a significant risk of fraud and abuse in the insurance system. Therefore, the insurable interest requirement acts as a safeguard, ensuring that insurance remains a mechanism for risk management and protection, rather than an avenue for illicit financial gain.