When does an insurable interest typically exist?

An insurable interest typically exists when a person has a legitimate stake in the preservation or safety of the subject of insurance, meaning they would experience a financial loss or benefit from the insured event occurring. This principle is crucial in insurance contracts to prevent moral hazard and ensure that the insured has a genuine interest in the protection of the insured property or person.

In the context of the correct answer, when an employer insures the life of a key employee, a clear insurable interest exists. The employer stands to lose financially if the key employee were to pass away, as this could impact the business operations, revenue, and overall success of the company. This relationship creates a valid reason for the employer to take out a life insurance policy on the employee, ensuring the employer's financial stability in such an unfortunate event.

As for the other options, insurable interest is less straightforward. For instance, if a person buys insurance for a friend's property, the individual may not have a direct financial stake in the property's loss, which could render the insurance contract invalid. Similarly, while family members in the same household may have some degree of insurable interest, it is not universally applicable in every scenario without further context, as it would depend on the specific financial relationship and dependence between