What does 'insurable interest' refer to in terms of insurance application?

Insurable interest refers to a key principle in insurance that requires the policyholder to have a legitimate interest in the insured item, person, or entity at the time the insurance application is made. This means that the individual applying for coverage must demonstrate that they would suffer a financial loss or detriment if the insured event occurs. For example, a person purchasing a life insurance policy on a family member must have an insurable interest in that individual, as their financial wellbeing might be affected by the death of that person.

This principle ensures that insurance contracts are not used for gambling or speculative purposes; rather, they serve to protect against genuine risks where the policyholder has a vested interest. Without this insurable interest, insurance contracts could potentially become detrimental to the solvency and operational integrity of the insurance industry.

In contrast, while financial necessity is relevant to some extent, it does not encompass the definition of insurable interest as comprehensively as the timing aspect does. The age of the applicant and health history are relevant factors in determining risk and underwriting policies but do not directly define insurable interest.