Final answer:
Option A. The principle of insurable interest for a life insurance contract is that the beneficiary must have an insurable interest in the insured individual, which ensures that the beneficiary would suffer a loss in the event of the insured's death, thereby reducing the risks of moral hazard and fraud.
Step-by-step explanation:
The principle of insurable interest in regards to a life insurance contract is described as follows: a) The beneficiary must have insurable interest in the insured individual. In life insurance, this means that the person or entity named as the beneficiary of the policy must stand to suffer a financial loss or certain types of personal losses in the event of the insured person's death. It is a fundamental legal principle meant to prevent people from taking out insurance policies on others in whom they have no legitimate interest, which could otherwise lead to moral hazard and potential abuse of the insurance system.
To elaborate further, the policy owner, who is often also the insured, must demonstrate an insurable interest at the time of policy inception. Insurable interest exists when the insured person's death would result in a financial or emotional loss to the policy owner. This principle is crucial in mitigating risks of fraud and moral hazard within the insurance sector and ensures that the insurance method remains a means of legitimate financial protection.