There are multiple reasons why people buy life insurance coverage.
For most instances, though, individuals want to ensure that someone whom they love and care about like family members/family relationships or a business partner will not need to suffer financial hardship should something happen to them.
Certainly, one of the key aspects of life insurance is the named beneficiary that is listed on the policy. The beneficiary is defined as the person or entity that is named in the policy to receive the insurance proceeds of the death benefit from such policy.
A beneficiary is often a person, such as a surviving spouse or children. However, the beneficiary does not always have to be a person.
The policyholder states the beneficiary as a person, a trust, an estate, or a business. In any case, however, there must be an “insurable interest” in the insured.
Table of Contents:
- What is an Insurable Interest in Life Insurance?
- Why Must There Be An Insurable Interest?
- What Are Some Examples of Insurable Interest?
- Why Does The Law Require Insurable Interest?
- What Qualifies as Insurable Interest?
- Why is Insurable Interest Important?
What is an Insurable Interest in Life Insurance?
An insurable interest exists when a beneficiary essentially derives a financial interest or other type of benefit from the continuous existence and bodily safety of the insured person/policy owner – so, then, if the insured person were to die, the beneficiary would suffer some type of financial loss.
Basically, it covers those whose financial well-being relies on the lives of others.
Why Must There Be An Insurable Interest?
Prior to purchasing any type of insurance premium, there must be an insurable interest between the insured and the beneficiary that is named in the life insurance policy.
For example, it would not make sense to purchase a homeowner’s insurance policy on somebody else’s house. In fact, the application would likely not even be accepted on the basis that there is no insurable interest.
In the United States, insurance law states there must be an insurable interest to render the life insurance contract valid. In fact the Supreme Court stated this very fact in the case of Warnock vs. Davies, saying that if such contract existed without the insurable interest, it is essentially a “wager” against someone’s life within the insurance industry.
What Are Some Examples of Insurable Interest?
A person has an insurable interest in something or somebody when the loss of that item or person would cause the other to suffer some type of financial loss or other kinds of losses.
For life insurance, everybody is considered to have an insurable interest in their own lives. In addition, everyone is considered to have an insurable interest in the life of their spouse and their dependents.
Therefore, a person is considered to have an insurable interest in the life of the purchaser of the policy and has a reasonable expectation of a profit or other type of benefit received from the continued life of the person who is insured by the coverage.
Why Does The Law Require Insurable Interest?
It is valuable to know that the insurable interest in life insurance must be at the time of application. In fact, every state requires that an insurable interest exists with the insured and the beneficiary at the time that the life insurance application is written by an insurance agent.
Life insurance policies that are issued where there is no insurable interest are regarded to be null and void from the very beginning by underwriters. This is because they are actually against public policy. In some ways, they are considered to be against public policy because they could encourage murder for profit.
What Qualifies as Insurable Interest?
State laws have established some guidelines as to who may or may not have an insurable interest in an individual.
These persons fall into three different categories.
The categories include those who are:
Related by Blood or Marriage
Those who are related by blood or marriage generally have an insurable interest in their spouses, children, and dependents.
These people would normally include husbands and wives, parents and children (including children who are adopted), grandparents and grandchildren, brothers and sisters, and engaged couples in most states.
Those who may not fall into the insurable interest category with regard to blood relationships or marriage would include other relatives due to marriage, nieces and nephews, cousins, uncles and aunts, and stepchildren and stepparents.
Business relationships considered to have an insurable interest would include those with financial dependency.
In this category, an insurable interest may be created in an otherwise non-insurable interest relationship. Someone who receives an economic benefit from the continued life and health of another person has an insurable interest in that other person’s life.
Creditors are also allowed to take out life insurance on the lives of their debtors. However, this must involve the debtor’s consent, and the amount of life insurance can only be up to the limit of the debt. An example of a creditor who qualifies for an insurable interest relationship is a mortgage company.
In any of the above scenarios, the life insurance company has a duty to exercise care in determining if insurable interest exists and whether or not the consent of the person insured has been obtained before giving life insurance quotes. If the insurance companies do not exercise caution in this area, they could be sued.
As mentioned, the insurable interest must exist at the time of the life insurance application, and not necessarily at the time of the loss. An example would be a woman who purchases a life insurance policy on the life of her fiancé. If the relationship breaks up, the woman will still be able to collect benefits on the policy as long as she keeps it in force by paying the premiums.
Why Is Insurable Interest Important?
Without the insurable interest requirement on life insurance policies, some people may be tempted to purchase life insurance policies on other people in order to collect the death benefit by having the insured person killed.
Since a person is always considered to have an insurable interest in his or her own life, the beneficiaries of policies that an insured purchases on himself or herself do not need to have an insurable interest. This is because it is assumed that the insured would name as beneficiary a person (or persons) who love him or her and would want them to have a long and healthy life.
Therefore, a person can purchase as much life insurance as he or she wishes (subject to other life insurance company limits), and can name whoever he or she wishes as the policy beneficiary.