Insurable Interest

Insurance is meant to compensate for real losses, not to allow people to gamble on events that do not affect them. Insurable interest ensures that the policyholder has a legitimate stake in what is being insured.

For example, a homeowner has an insurable interest in their house, because they would lose money if it burned down. A stranger with no connection to the house does not, and could not take out a valid insurance policy on it. A bank that has lent money secured on the house also has an insurable interest, up to the amount of its loan.

In life insurance, people are generally considered to have an insurable interest in their own lives and in the lives of their spouses or partners. Businesses may have an insurable interest in key employees, and creditors in their debtors. The exact rules vary by country.

Insurable interest also reduces moral hazard. If people could insure property or lives in which they had no stake, they might have an incentive to cause the loss. For property insurance, insurable interest usually must exist at the time of the loss; for life insurance, it is usually required when the policy is taken out.