What is Insurable Interest in Life Insurance?
To purchase a life insurance policy on another person, proof of "insurable interest" and consent from the insured are required.
A person has an insurable interest in another person in life insurance when the death of that person would result in a financial, emotional, or other type of loss. Insurable interest can exist in many situations, such as marriage, but it is evaluated by the insurance company during the application process and before the death benefit is paid.
What is insurable interest?
If you would suffer some kind of loss if that person or property were to be lost or damaged, you have an insurable interest in it. Furthermore, the continued existence of that person or property would benefit you financially. As a result, it would make sense for you to purchase insurance on it in order to continue receiving those benefits.
What is insurable interest in life insurance?
You can't just take out a life insurance policy on anyone. In order to purchase a policy, there must be insurable interest. In the case of a life insurance policy, the policy owner must always have an insurable interest in the insured's life. Also, if the policy owner is not the beneficiary, the beneficiary named in the contract must have an insurable interest in the insured person.
Insurable interest means that an individual receives a financial or other type of benefit from the person insured's continued existence. As a result, if the insured person died, the surviving person would suffer a financial loss or other hardship.
- Assume you wanted to buy a life insurance policy on person A (Bob) and name person B as the beneficiary (Sam). In this case, you and Sam would both need to have an insurable interest in Bob's life in order to purchase the policy.
How to prove insurable interest
Proof of insurable interest is required when applying for and purchasing a life insurance policy. Life insurance is a tool used to make you whole again after someone's financial loss. In theory, some people might be tempted to buy a life insurance policy on a random person in order to profit if that person died. This is why the principle of insurable interest was developed in order to ensure that life insurance was used correctly.
Insurable interest is a requirement of all life insurance policies. The policy may be void or denied if there is no insurable interest. It is the policyholder's responsibility to demonstrate that they have an insurable interest in the insured party. Proof must be provided at the time of application as well as at the end of the policy when the insured has died.
A life insurance company will usually speak with the policy owner, beneficiary, and insured to confirm the presence of an insurable interest. They will investigate the proposed insured's relationship and determine whether there is an insurable interest. If an insurable interest is not discovered, the policy will be denied or the death benefit will not be paid out.
When does insurable interest exist in a life insurance policy?
Because you are always considered to have an insurable interest in your own life, you can buy life insurance on yourself. You would be both the policyholder and the insured in this case. Furthermore, the policy's beneficiaries would not need to demonstrate an insurable interest in you because it is assumed that you will name beneficiaries who want you to live a long and healthy life.
Insurable interest also includes your direct dependents and blood and marriage relationships. This could include:
- Wives and husbands
- Children (including adoption)
- Grandchildren and grandparents
- Sisters and brothers
All of the examples above are direct blood relationships in which insurable interest is always present. In business and creditor-debtor relationships, insurable interest can also exist.
If you are financially dependent on the existence of the insured, you have an insurable interest.
- Assume you start a business and hire Alex to run it. In this case, you would have an insurmountable stake in Alex's life because his death would result in a loss of profits for your company. This is a common practice known as business life insurance.
Corporations frequently purchase key man life insurance for their officers, while business partners can buy life insurance contracts for each other.
Creditors and credit companies may purchase life insurance policies on their debtors. In this case, with the debtor's permission, the company could purchase a life insurance policy for the amount owed.
When does insurable interest not exist?
Insurable interest is common in blood relationships, but it does not exist in the following scenarios unless there is proof of financial dependence:
- Uncles and aunts
- Cousins
- Nephews and nieces
- Stepparents and stepchildren
Assume you have an elderly neighbor who is 90 years old. You think about getting a life insurance policy for your neighbor because she doesn't have much time left. This is not an insurable interest situation because you would not suffer a financial loss as a result of your neighbor's death.
Can I buy life insurance on my parents without their consent?
You may decide to purchase life insurance for an aging parent because there can be significant costs if that parent dies. It is possible to buy life insurance on a parent, but the parent must sign off on the policy purchase in writing.
- Funeral services, for example, cost about $8,000 on average. If you don't have this much money saved up, you could use life insurance to cover an expensive but necessary expense like this.
Can I buy life insurance on my child's mother or father?
You can purchase a life insurance policy on another person if you can demonstrate and prove that you have an insurable interest in them, such as an ex-spouse or co-parent. This would necessitate demonstrating that the loss of that person would result in financial hardship for you or your child.
- For example, if your child's divorced father dies, you may be unable to receive future child-support or alimony payments. This may be an insurable interest, in which case you could buy a life insurance policy in which you are the beneficiary and your ex-husband is the insured.