Purchasing life insurance can be a difficult task. You may feel the need for a dictionary as you try to find out what form of life insurance you need and sort through the complicated lingo. So, let’s deconstruct one of those legalese concepts you’ve probably come across: insurable interest.
When buying life insurance, the buyer must have an “insurable interest” in the covered person. This means that if the insured dies unexpectedly, the policyholder, i.e. the person who holds the policy and specifies the beneficiary or beneficiaries, may incur a financial loss.
It’s vital to understand that this type of relationship is only required between the policyholder and the insured, not between the policyholder and the beneficiary. It is not necessary for beneficiaries to have an insurable interest in the insured (see our previous blog post). Insurable interests can arise in a variety of scenarios, including:
An employer or business partner (if labelled as “important personnel”) – A financially dependent ex-spouse – A spouse or family member An unsecured creditor
In each of these cases, the policyholder has a financial or emotional stake in the insured’s well-being. Strangers may essentially gamble on the lives of others if insurable interest was not a criterion for taking out life insurance. A policyholder with no vested interest in the insured’s life would be enticed to damage the insured in order to profit from an early death payment.
A non-negotiable necessity for any type of insurance, including life insurance, is an insurable interest. The policy is cancelled if there is inadequate insurable interest between the policyholder and the insured. In the case of Warnock v. Davis, the Supreme Court of the United States held that a life insurance policy without insurable interest is a “wager” against the insured’s life.
Many state statutes also include precise definitions of what constitutes an “insurable interest.” Insurable interest is defined as “a reasonable expectation of pecuniary profit via the prolonged life, health, or bodily safety” of the insured, or “a considerable interest created by love and passion in… people closely connected by blood or law” in California Insurance Code 10110.1.
In life insurance, what is insurable interest?
In plain terms, “insurable interest” indicates that if you died, someone would face financial difficulty. A basic need for a life insurance contract is that the individual acquiring the policy has an insurable interest in the person being insured.
The beneficiary of insurable interest is an example
For example, if you and your husband have a two-income home with three children, your spouse would clearly have an insurable interest in your death because going from two to one income would be financially difficult. As a result, most life insurance firms allow spouses to acquire policies on their partners’ lives.
Insurance firms employ insurable interest in life insurance for a variety of reasons, one of which is to avoid insurance fraud. Because insurance firms are in the business of preventing losses, you must demonstrate that an actual economic loss would occur before insuring someone.
Insurers won’t let you get a life insurance policy in the name of a stranger because their death won’t affect you financially. You can’t, for example, buy a life insurance policy on a famous person and expect to get paid after they pass away. That’s exactly what the insurance company is seeking to avoid by going through the process of determining your insurable interest.
When does a life insurance policy have to have an insurable interest?
Insurable interest is usually required in life insurance policies. In order to get a life insurance policy, the policy owner must demonstrate an insurable interest in life insurance. (Insurable interest instances of those who can normally claim insurable interest are provided below.)
Close family members usually qualify immediately, but if someone outside of your family wants to take out a life insurance policy in your name because they rely on you financially, such as a business partner, this criterion applies. Of course, you only need to show that you have insurable interest at the time you acquire life insurance.
If you’ve recently married, for example, you have an insurable interest in your spouse and can purchase insurance on them.
Examples of insurable interest
Your partner or spouse: This is the most typical type of person with whom you might have an insurable interest. As part of your divorce settlement, you may need to name an ex-spouse as a beneficiary.
Your children: You have an insurable interest in your children as well, but you must be 18 years old or older to obtain a policy on them.
Other relatives: You may be required to provide additional documentation to ensure other relatives, such as a disabled sibling or an ageing parent who is financially dependent on you.
To purchase a policy on a business partner or to allow your business partner to obtain a policy on your life, you’ll need to provide paperwork. More information about a company owned life insurance can be found here.
What is the best way to demonstrate an insurable interest in life insurance?
Your insurance agent will assist you in determining which persons in your life may meet the insurable interest criterion, such as your children or husband, when you acquire a life insurance policy.
If you are financially supporting someone who is not in your immediate family, you can tell your insurance agent that you wish to insure their lives.
Requirement of insurable interest
To verify those individuals, your agent may request official identification, a medical examination, or a phone conversation to obtain additional information about your relationship. Most importantly, this process will give you and those who rely on you the assurance that they will be financially secure if you die.
Frequently Asked Questions about Insurable Interest
Is there always an insurable interest in life insurance?
Yes, insurable interest is a necessary condition of a life insurance policy. The person buying the policy must have an insurable interest in the person being insured.
Why am I unable to claim an insurable interest without the consent of a third party?
You’d have to gain their permission and show that their death would have a financial impact on you if you wanted to take out a policy in their name. Strangers will not be able to claim other people’s assets when they die as a result of this.
What Is the Purpose of Insurable Interest?
Insurance firms benefit from insurable interest because it helps them avoid insurance fraud.