PSI Life Exam Practice Test 2026 - Free Life Insurance Exam Questions and Study Guide

The term that refers to the requirement to have a financial interest in order to obtain insurance is "insurable interest." Insurable interest is a foundational principle in insurance that ensures the policyholder has a legitimate stake in the continued existence of the insured entity or individual. This requirement helps prevent moral hazard, where someone might be encouraged to cause loss or damage if they stand to benefit financially from the insurance payout.

In the context of property insurance, for example, insurable interest means that the policyholder must own the property or have a legal or financial interest in it. For life insurance, it means that an individual must have a genuine concern for the well-being of the life insured, such as a spouse, child, or business partner. Without insurable interest, insurance contracts would turn into speculative bets, which is not the intended purpose of insurance as a risk management tool.

In this way, insurable interest serves not only to provide financial protection but also to uphold the ethical standards of insurance as a means to manage risk rather than to facilitate gambling on losses.