Insurable Interest in Life Insurance: Ensuring Protection

What Is Insurable Interest in Life Insurance?

Because insurance is designed to protect you against the potential for loss, you must have a stake in losing a person. Therefore, insurable interest is the risk of losing whomever you are seeking to insure. You will be asked to prove insurable interest or financial dependency on a person before having the insurance policy approved.

People purchase life insurance for several reasons. Spouses might purchase life insurance on each other to protect themselves from financial struggles in case one dies prematurely. Another common scenario is purchasing life insurance on a business partner because the business would be severely impacted in the event of the person’s death.

In both examples, the surviving spouse and business partner had an insurable interest in life insurance of the deceased. In other words, they both would have experienced significant financial hardship if the insured were to die. People can’t take out life insurance policies on just anyone. Instead, they must benefit financially or otherwise from the insured being alive.

Establishing Insurable Interest

The insurance company and its underwriting staff are responsible for proving Insurable Interest in Life Insurance, and to do so they will seek information about the prospective policy owner, the beneficiary, and the insured. The company will ask questions regarding the insured’s relationship to the policy owner and beneficiary and decide if there is an insurable interest. If the insurance company does not find insurable interest, then the application will be denied.

As in the example above, a company can take out a life insurance policy on one of its employees. This is particularly common for executive-level employees. Spouses, business partners, top-tier employees, and immediate family members can often easily prove insurable interest. Several relationships automatically guarantee insurable interest:

• Businesses can insure key employees: Key employees are often considered executives, such as CEOs and presidents, business partners, and sometimes board members.
• Immediate family members can insure each other: Family members that get presumed insurable interest are parents, grandparents, children, siblings and sometimes engaged couples.
• Creditors can insure debtors: Provided a debtor consents to the coverage, a creditor can sometimes insure his or her life. This is common in large business deals such as franchising and other major loan scenarios.

Insurable interest in one’s own life is legally considered as?

Insurable interest in one’s own life is legally considered as the stake or financial interest that an individual has in their own life. This interest must be present at the time the insurance policy is taken out for it to be considered valid and legally binding. In other words, an individual must have a vested financial interest in their own life to be able to insure it.

The concept of insurable interest is an important one in the insurance industry as it ensures that individuals cannot take out insurance policies on the lives of others without having a legitimate financial interest in doing so. For example, a business partner may have an insurable interest in the life of their co-partner to protect the financial stability of the business.

Overall, insurable interest in one’s own life is a legally recognized concept that serves to protect both insurance companies and policyholders by ensuring that policies are only taken out when there is a legitimate financial interest at stake.

When Must Insurable Interest Exist?

If you are a married person, you are not required to provide Insurable Interest in Life Insurance. This is because when a couple is in a relationship, it is presumed that they are financially entwined.

However, that’s not always true in relationships. That is why it is necessary to answer the question of “When must insurable interest exist?”

Here are some instances when you may have to prove insurable interest:

– Insurance for Parents and Grandparents

In this case, some families buy life policies about family members who make a difference in their lives, if they die. For example, a grandparent may continue to provide support for his / her grandchildren. Similarly, if a parent does not have anything to leave for the kids when they die, the children may decide to go for a life insurance policy so they will receive some cash when the parent dies.

Lastly, some adult children buy final expense insurance for their parents to pay for their burial and any remaining bills.

– Insurance on Partners/Fiancées

It’s becoming so common to have people live together without getting married as compared to the past. Of course, that poses a problem when it comes to life insurance products as well. These couples need to convince the insurance company that they are financially interdependent.

For example, the individual who wishes to get a policy on the partner can produce a lease in both names, provide a car payment for a car that belongs to the couple, or provide evidence of engagement and plans to get married.

– Insurance on Business Partners or Employees

There is another option for the answer to the question “When must insurable interest exist in a life insurance policy?” This option is related to business. It can be okay for one of the partners to insure the other because, for instance, they might have a hard time managing the business if something happened to the other partner. Similarly, an employer may wish to have an insurance policy for an employee who is difficult to find.

When does insurable interest not exist?

Insurable Interest in Life Insurance is generally present in blood relationships but would not exist in the following scenarios unless there is proof of financial dependence:

• Aunts and uncles
• Cousins
• Nieces and nephews
• Stepchildren and stepparents

Why Does Insurable Interest Matter?

Insurable Interest in Life Insurance matters because without proving it exists, you won’t be able to get a life insurance policy approved by the insurance company. But insurable interest also protects against fraudulent reasons for taking out a life insurance policy, such as causing and then profiting off of the insured person’s death.

Because the insurable interest is required, the death benefit would only be paid out to those who will stand to lose when that person passes. This requirement only matters at the time of purchase.

Conclusion:

Understanding Insurable Interest in Life Insurance is crucial in maintaining the ethical foundation of life insurance. It prevents the misuse of policies and ensures that only those with a genuine stake in another person’s life can benefit from insurance payouts. As the insurance landscape evolves, questions arise: Should the scope of insurable interest be broadened to include more diverse relationships, or should it remain tightly regulated to prevent abuse? The answers to these questions will shape the future of life insurance and its role in personal and financial protection.

FAQs

1- Do you always have to prove an insurable interest in life insurance?

Not necessarily. For example, if you’re both the insured and the policyholder, you wouldn’t have to prove an insurable interest. And if you’re taking out a policy on a close family member, you may only have to obtain their consent as insurable interest would be implied based on the relationship.

2- Must an Insurable Interest Always Exist in Life Insurance?

Yes, insurable interest is a basic requirement for a life insurance contract. The person who is purchasing the policy needs to have an insurable interest in the insured person.

3- Why Can’t I Claim an Insurable Interest Without Someone’s Consent?

If you wanted to take out a policy in the name of a non-family member, you’d have to get their consent and prove that their death has a financial impact on you. This prevents strangers from illegally trying to claim other people’s assets when they die.

4- Why Does Insurable Interest Exist?

Insurable interest helps insurance companies prevent insurance fraud.

References:

• https://blog.massmutual.com/insurance/can-you-get-life-insurance-on-anyone
• https://www.canarahsbclife.com/faqs/life-insurance/what-is-insurable-interest-and-how-do-insurable-interest-works#:~:text=Insurable%20interest%20refers%20to%20an,can%20cause%20a%20financial%20loss.
• https://www.bankrate.com/insurance/life-insurance/insurable-interest/#what-is-insurable-interest-in-life-insurance