What is the 'insurance interest' requirement in life insurance policies?

The 'insurance interest' requirement in life insurance policies is foundational to the validity of the contract between the insurer and the policyholder. For life insurance policies to be enforceable, the policyholder must have a legitimate interest in the life of the insured person. This means that the policyholder will suffer a financial disadvantage if the insured were to pass away. By ensuring that the policyholder has a genuine stake in the insured's life, the insurance industry helps prevent moral hazards, such as potential incentives for the policyholder to cause harm to the insured.

This requirement serves both ethical and legal purposes: it protects the insurance company from fraudulent claims and ensures that insurance is used as a risk management tool rather than a means of speculative profit. A policyholder's emotional attachment to the insured, while possibly relevant on a personal level, does not fulfill the necessary legal criteria for this interest, nor does merely informing the insured or naming a beneficiary establish the required legitimacy of relationship or risk involved. Therefore, the focus on having a legitimate financial interest in the life of the insured is what correctly defines the insurance interest requirement.