Chartered Life Underwriter Practice Exam 2025 - Free CLU Practice Questions and Study Guide

The principle of insurable interest is crucial in the realm of insurance and asserts that the policyholder must have a legitimate interest in the life or property being insured. This principle is grounded in the idea that insurance is intended to protect an individual or entity from financial loss, not to serve as a gambling mechanism or speculative investment. By requiring insurable interest, the insurance industry ensures that the policyholder would suffer a financial loss if the event insured against occurs, thereby promoting ethical practices and reducing moral hazard.

This principle applies in various contexts, particularly in life insurance, where it ensures that individuals can only insure lives in which they have a personal or financial stake. For example, a parent has an insurable interest in the life of their child, and a business may have an insurable interest in the life of a key employee. This aligns the interests of the insured and the insurer, as the policyholder will seek to prevent loss, leading to more responsible behavior regarding risk.

The other options do not accurately reflect the nature of insurable interest. Some suggest broad or irrelevant criteria that do not align with the fundamental aim of ensuring a legitimate financial interest, which is key for the integrity of insurance contracts.