In cases where a life insurance policy owner is not the same person as the insured, insurance companies often require that such purchases be for those with an "insurable interest"
For life insurance policies, close family members and business partners will usually be found to meet this test. In this case the purchaser is demonstrating that they would suffer an economic loss if the insured were to die. What economic argument could be made for why insurance companies would make such a restriction when it seems there might be a market for life insurance to people who wish to insure others for whom there is not such "insurable interest"?
The life insurance company may be considering that the person taking out such a policy is doing so because they believe the policyholder may have reason to know the insured may die soon. In this case the life insurance company would be taking on a policyholder who represents a higher risk. This type of restriction is an attempt to forestall the adverse selection problem.
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