What is meant by "insurable interest" in life insurance?

In the context of life insurance, "insurable interest" refers to the legitimate interest that a policyholder must have in the life of the individual being insured, and this must exist at the time the policy is issued. This concept is crucial because it ensures that the policyholder has a valid reason to insure the life of the individual, typically based on a financial stake or emotional bond, such as family ties or business relationships.

For example, a parent insuring their child's life has an insurable interest due to the familial relationship, while a business partner might insure the life of their counterpart due to potential financial implications of the partner's death in relation to the business. This principle helps prevent insurance from being used as a gambling mechanism where someone might wish to take out a policy on someone else's life without any real connection or reason.

The other options do not accurately define insurable interest. The requirement that the policyholder must be a relative is too narrow, as non-relatives can also have an insurable interest. The idea that interest changes based on the insured's financial status or that it involves assessing the insured's health conditions does not capture the foundational aspect of the concept, which is the need for a legitimate interest at the time of policy issuance.