Insurable Interest

Question 1

What Is Insurable Interest?

Answer 1

For any insurance contract to be valid, the policy applicant must have a legitimate insurable interest in the person or property that is to be insured.

Insurable interest is the financial interest someone has in property or a person’s life. It represents the financial impact that would be directly incurred by a policyowner upon the loss of property or person.

Spouses have a financial interest in one another, which translates into an insurable interest.

Question 2

Insurable Interest and Life Insurance

When is insurable interest required for life insurance?

When can insurable interest end?

What insurance always requires an insurable interest?

And what 2 parties never require insurable interest?

Answer 2

With life insurance, insurable interest is based on a relationship between the person applying for insurance and the person whose life is to be insured.

The applicant must reasonably expect a benefit or advantage from the continued life of the insured or loss when that life ends.

In short, the party acquiring the life insurance contract must be expected to suffer a financial loss from the insured’s death.

Insurable interest does not need to remain after a policy is issued. In fact, life insurance policyowners are free to assign policy ownership to anyone regardless of the assignee’s relationship to the insured.

In contrast, health insurance requires an insurable interest between the policyowner and the insured person at all times, both at policy issue and when a claim is made.

It is worth noting that an insurable interest is not required between the policyowner and the beneficiary at any time. Policyowners may designate virtually any person or institution as the policy beneficiary without regard for the relationship between the insured and the beneficiary.

Question 3

Name 4 Personal Relationships that are automatically deemed to have Insurable Interest …

Answer 3

In general, the following types of personal relationships are automatically deemed to represent an insurable interest:

• Individuals have insurable interest in themselves.
• Spouses have insurable interest in each other.
• Parents have insurable interest in their children.
• Children have insurable interest in their parents or grandparents (or another on whom a child might be financially dependent).

Beyond these relationships, the burden of proof lies with the applicant to prove there is an insurable interest. For example, an applicant who tries to purchase life insurance on a neighbor would have to demonstrate a clear financial interest in the neighbor’s life before an insurer would issue a policy.

Question 4

List 2 examples of Insurable Interest in Business Relationships

Answer 4

Insurable interest exists in a variety of business relationships.

• Life insurance is often bought by businesses to cover the lives of their key employees or owners. The intent is to make up for the financial losses that might occur when a key employee or owner dies.
• In addition, partners and partnerships use life insurance to ensure liquidity (cash on hand). Partners often insure each other’s lives (naming themselves as beneficiaries) in order to provide funds that can be used to buy out the business interest of the one who dies.

Often, life insurance on employees or partners is held even after the business relationship ends. As long as there is an insurable interest between the two business associates (as applicant and insured) when the policy is issued, a life insurance policy may be issued.

Question 5

The policy applicant must have a legitimate …

Answer 5

… insurable interest in the person or property that is to be insured.

Question 6

Life insurance policyowners are free to assign policy ownership to …

Answer 6

… anyone regardless of the assignee’s relationship to the insured.

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