What is meant by "insurable interest"?

The term "insurable interest" refers to the financial interest an individual or entity must have in the life of the person being insured. This concept is fundamental in insurance because it ensures that the policyholder has a legitimate reason to insure the individual, typically because they would suffer a financial loss should the insured person pass away or suffer a significant loss.

Insurable interest must exist at the time the insurance is purchased and is intended to prevent insurance policies from being taken out for speculative reasons or for the purpose of gambling on someone's death. This principle helps uphold the ethical standards of the insurance industry and safeguard against moral hazards.

In contrast, the other options do not adequately capture the essence of insurable interest. A mutual agreement regarding policy terms pertains more to the contractual aspects of insurance without reflecting the need for a financial relationship between parties. An assessment of the risk level of the insured relates more to underwriting processes, while a mandatory requirement for insurance approval implies prerequisites that could involve more than just financial interests, such as age or health status. However, the crux of insurable interest always lies in the financial stake in the life of the insured.