Insurance has occupied an important place of our lives. You may not think it to be an important thing to buy until a moment you are made to face a loss. One has rightly defined insurance as an act where a certain loss of a small magnitude is borne to replace an uncertain loss of a larger magnitude in the future. Here the certain loss of a small size typically represents premium and the uncertain loss is the sum assured.
Notably, the above definition does not talk about any investment or return. It is direct enough to talk about avoiding the larger loss. Simply, the aim of insurance is to cover losses by contributing a small premium into a pool.

Insurance helps you to cover any of the indefinite losses you may incur in the future. This necessitates that to insure there should be a possible loss with an ascertainable size. Typically, non-life insurance products adhere to this norm in all aspects. For life insurance products things are a bit different. In a contract of life insurance, an individual is insured against the event of death, which is sure to take place. However, the time at which the death takes place is uncertain and hence the contract holds good. In addition, the loss arising out death of a loved one cannot be ascertained. Still, insurance is allowed as there is loss for sure, and the sum assured is a function of factors like the earnings ability, insurability, premium payment capacity and some other factors.

Insurable interest is a key factor that can influence any insurance contract. You cannot insure anybody and everybody around you. Many of us may think that they can insure anyone around them out of sheer love and affection. This, however, does not hold good. According to the definition; it strongly states that there should be a possibility of loss.
This possibility of loss is well captured by the term 'insurable interest'. There are some factors, which are essential to establish insurable interest--something capable of being insured, which must be the subject matter of the insurance contract and a relationship recognized by law that states that the insured is at benefit when the subject matter is at safety and at a loss when the subject matter is prejudiced.

Insurable interest puts restrictions on what can be insured and by whom. It has considerably reduced the risk that otherwise may prevail in the market. You have unlimited insurable interest in your life and your family's life. Husbands and wives have insurable interest in each other's property. Parents cannot insure their children, as there is no monetary interest as such. Child insurance products are primarily positioned as investment products that secure only a child's future and not insuring his or her life.
You may feel that the concept of insurable interest is stopping you from insuring people and things around you. Especially when you come across an insurer that denies you covering your brother's life or that of your sister's, the concept is seen as a restrictive one. However, this concept effectively helps in securing one's financial interest.

Assume that you have extended a loan of Rs 20 lakh to your brother's friend for the purpose of business. Even if you do not have a close relationship with your brother's friend, you can insure him too with an insurable interest. However, the sum assured should not exceed the loan extended to him, as you can only cover your possible loss due to his death before paying back the loan but under no circumstance can you make a profit out of it.
This logic can be extended to the partners of a partnership firm where the partners are liable for each partner's deeds jointly and severally. One can easily insure his or her partners to the extent of a potential loss he or she may suffer due to the death of the partner.

Banks used to insure their individual borrowers on a group basis. Micro-finance companies are doing this on a larger scale even today. Earlier, banks used to offer personal accident insurance coverage to their credit card customers. In those days, in case of an eventuality, the bank would take the credit card outstanding from the insurance proceeds and would pay the rest to the survivors of the deceased. However, today the coverage is discontinued in most cases because credit cards become free and the banks are burdened with the premium.

The human factor in all business organizations is very important. A company can very well insure its employees under key man insurance. The employee also has an insurable interest in the employer to an extent of his salary. However, in modern times, when we come across institutions as employers, this is irrelevant. If you are acting as an executor or a trustee and are legally responsible for a property, then you can affect insurance on that property. While acting as an agent you are entitled to effect insurance on the things, for which you are held responsible for safe keeping or your principal is responsible, respectively.
A mortgagee has insurable interest in the property mortgaged. However, if you are a shareholder of a company, you cannot affect insurance on the company’s property. It also holds good for a creditor unless he proves that the property or asset is the security offered to him for the credit so extended. In a contract, where the insurable interest cannot be established, the insured is not entitled to refund of premium.