Which scenario best illustrates the concept of insurable interest?

The concept of insurable interest is rooted in the principle that the policyholder must have a legitimate interest in the preservation of the life or property being insured. This ensures that the insurance policy is not taken out on mere speculation but rather on a valid concern for financial loss.

In the case of insuring a close family member, the individual typically has a strong emotional and financial stake in that person's well-being. For example, if a family member were to pass away, the insured could experience not only emotional grief but also potential financial repercussions due to loss of support. This type of relationship confirms the existence of insurable interest, as it reflects a deep personal connection and a reasonable expectation that the policyholder would suffer a loss.

In contrast, insuring a stranger or someone with whom there is no familial or financial connection does not satisfy the insurable interest requirement, as the policyholder wouldn't face a tangible loss in the event of that person's death. Similarly, investing in life insurance for a deceased relative or taking out a policy on a neighbor's house does not illustrate this principle effectively, as it either pertains to an event that has already occurred or lacks a direct interest in the property being insured. Thus, the scenario of insuring a close family member clearly aligns