What must exist to ensure a genuine risk and the ability to pay premiums when insuring another person?

To ensure a genuine risk when insuring another person, it is essential that insurable interest exists. Insurable interest refers to a legal and financial interest in the life of the insured, meaning the policyholder must have a stake in the individual's continued life and well-being. This requirement protects the integrity of the insurance system by ensuring that people do not take out insurance policies on others without a legitimate reason, which could lead to moral hazards or unethical behavior.

Furthermore, having insurable interest confirms that the policyholder will face financial loss if the insured person suffers harm or dies. This concept is foundational in establishing the validity of an insurance contract. If insurable interest is absent at the time of the policy creation, the contract may be void from the outset, and the insurer could be exposed to unnecessary risk.

While beneficiary designations, term limits, and cash values relate to different aspects of life insurance policies, they do not directly address the core requirement of having a stake in the insured's life, which is crucial for justifying insurance coverage.