Not able to turn on the " Unlock MacBook with my Apple Watch"

My MacBook asks me to enter the password of my Apple ID for security reasons I guess and automatically disable "Unlock my MacBook with my Apple Watch".

However, I am not able to turn it back on directly even after I successfully re-enter the password with something problem as "log in your Apple Watch with Watch app on your iPhone". That makes no sense as my watch is working properly and even shows up in the iCloud setting on the MacBook.

Logging off and back on my iCloud on my MacBook does solve the problem temporarily but does not eradicate the problem as it will reoccur weeks later.