When does insurable interest need to exist?

Insurable interest is a fundamental concept in the realm of insurance that ensures a valid relationship between the policyholder and the insured. This concept primarily exists to prevent insurance fraud and to ensure that the policyholder has a legitimate reason to seek coverage on an individual’s life or property.

The requirement for insurable interest to exist before the policy is issued and at the time of application is critical. This means that when an individual applies for an insurance policy, they must demonstrate that they would suffer a financial loss or hardship if the insured event occurs, such as the death of the insured individual or damage to the insured property. This requirement safeguards the integrity of the insurance underwriting process and aligns with the principles of risk management.

Subsequently, if insurable interest were only necessary at the time of the claim or solely during the coverage period, it could create opportunities for moral hazard or fraudulent claims, as individuals might take out policies on unrelated or distant parties without genuine concern for their financial well-being. Thus, the correct answer reinforces the importance of having insurable interest established both at the initial application stage and prior to issuing the policy, fostering trust in the contractual relationship between the insurer and the insured.