Insurance Foundations and Principles of Life and Health Insurance
Risk and insurable risk
Insurance handles pure risk (loss or no loss) and never speculative risk (chance of gain or loss), which is uninsurable. A peril is the cause of loss (death, illness, fire); a hazard increases the likelihood or severity of loss (physical, moral, morale, legal). Insurers depend on the law of large numbers - a large pool of similar risks makes total losses predictable - and fight adverse selection, the tendency of poor risks to seek coverage.
Contract characteristics
Life and health policies are contracts of utmost good faith, adhesion (the insurer drafts; ambiguity is construed against the insurer), aleatory (unequal value exchanged), unilateral (only the insurer makes an enforceable promise), and conditional (benefits depend on conditions). Health insurance is an indemnity contract - it restores the insured to roughly the pre-loss financial position. Life insurance is a valued contract: it pays a stated face amount, so a $1,000,000 policy on a modest earner still pays $1,000,000. Questions love that distinction.
Insurable interest
For life insurance, insurable interest must exist at the time of application, not at death: self, spouse, dependent, business partner, or key employee with a demonstrable economic stake. Because interest is not retested later, a policy stays valid after divorce or a job change. A new or replacement policy requires a fresh showing, and stranger-originated life insurance (STOLI/IOLI) is prohibited.
Rule of thumb: interest starts the contract; it does not have to finish it.