The insurable interest in life insurance is the interest the policyholder has in the insured’s life. In other words, it is the reason why the policyholder would want the insured to live. This interest must be present when the policy is taken out and must be maintained throughout the duration of the policy. If the policyholder no longer has an insurable interest in the insured’s life, they can no longer keep the policy in force.
The concept of insurable interest is important because it helps to ensure that people do not take out life insurance policies on strangers with no reason to do so. If there were no such thing as insurable interest, people could take out policies on anyone and collect the death benefit when that person dies. This would create a lot of opportunities for fraud and abuse.
What is an insurable interest?
An insurable interest is a financial or other stakes that an individual has in something that would be adversely affected by its loss. The concept is used in the insurance industry to determine whether an individual can purchase insurance on another person’s life.
To have an insurable interest in someone, you must demonstrate that their death would cause you financial hardship. For example, if you are married to someone, you generally have an insurable interest in them because their death would likely cause you financial hardship. Similarly, if you have co-signed a loan with someone, you have an insurable interest in them because their death could leave you responsible for the entire loan.
The three conditions of an insurable interest
For an insurable interest to exist in life insurance, three conditions must be met:
1. The insured must have a financial interest in the insured’s life.
2. The insured’s death must result in a financial loss to the policyholder.
3. The policyholder must be able to prove their insurable interest to the insurance company.
If these three conditions are not met, an insurable interest does not exist, and the life insurance policy will be void.
Types of insurable interests
There are three types of insurable interest in life insurance: financial, familial, and sentimental.
Financial insurable interest exists when the insured’s death would financially harm the policyholder. For example, a business owner may take out a life insurance policy on a key employee. If that employee were to die, the business owner would be financially harmed and have an insurable interest.
Familial insurable interest exists when the insured’s death emotionally harms the policyholder. For example, a parent may take out a life insurance policy on a child. If that child were to die, the parent would be emotionally harmed and have an insurable interest.
Sentimental insurable interest exists when the policyholder has a sentimental attachment to the insured. For example, a person may take out a life insurance policy on a pet. If that pet were to die, the person would be emotionally attached and have an insurable interest.
How to determine your insurable interest
When you purchase a life insurance policy, you must have an insurable interest in the insured person’s life. An insurable interest is a vested financial interest in another person’s life. To have an insurable interest, you must demonstrate that there would be a financial loss to yourself if the person died.
There are two ways to establish an insurable interest in someone’s life: blood or contract. You have an automatically insurable interest if you are related to the person by blood. This includes parent/child, spouse/domestic partner, and sibling/sibling relationships. If you are not related by blood but have a contractually binding relationship with the person, you also have an insurable interest. For example, if you are co-signing a loan with someone or our business partners, you have an insurable interest in their life.
If you are unsure whether you have an insurable interest in someone’s life, you can always consult with a licensed insurance agent. They will be able to help you determine if you meet the requirements for having an insurable interest.
Conclusion
The insurable interest in life insurance is an individual’s financial interest in another person’s life. If the insured individual died, the policyholder would suffer a financial loss. For an insurance company to issue a life insurance policy, the applicant must have an insurable interest in the life of the insured individual.
