Final answer:
The principle of insurable interest in life insurance requires that the policy purchaser have a legitimate need for coverage, related to either emotional or financial ties to the insured, preventing moral hazard and aligning with insurance's fundamental laws.
Step-by-step explanation:
The principle of insurable interest in a life insurance contract ensures that the person purchasing the insurance policy has a genuine interest in the welfare of the person being insured, typically established by close relationships or financial dependency. This principle is necessary to prevent moral hazard and financial exploitation, as it discourages individuals from purchasing policies on lives with which they have no emotional or financial connection. The concept of insurable interest complements the other fundamental concepts in insurance, such as the sharing of risk and the need for the premiums collected from policyholders to cover claims, the costs of running the insurance company, and its profits.