What is required in insurance contracts to ensure compensation upon loss due to death or disability of another?

To ensure compensation upon loss due to death or disability of another, insurable interest is a fundamental requirement in insurance contracts. Insurable interest means that the policyholder has a legitimate interest in the continued life or welfare of the individual insured. This principle ensures that the policyholder stands to suffer a financial loss if the insured person dies or becomes disabled, which ultimately protects the integrity of the insurance system.

Having insurable interest prevents adverse selection, where individuals might take out a policy on someone else's life without any real connection to them, leading to moral hazard. In the case of life and health insurance, the existence of insurable interest is crucial for the insurance company to issue a policy. If a policyholder does not have an insurable interest in the life of the person covered, the contract would be deemed void, as life insurance should not function as a mere gamble on someone's life.

The other options do not adequately address the necessity of a legitimate financial stake in the insured to facilitate a valid insurance contract. For instance, a legal obligation may pertain to various types of agreements, but it doesn't specifically connect to the principle that underpins life and health insurance contracts like insurable interest does. Similarly, a confidence clause and compensation guarantee do not deliver the same