Which term refers to the requirement to have a financial interest to obtain insurance?

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Study for the PSI Life Exam. Enhance your knowledge with flashcards and multiple choice questions, each question comes with detailed explanations. Prepare effectively for your certification exam!

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.

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