What Determines an Insurable Interest in a Life Insurance Policy?

In this article, we will explore the definition of insurable interest and what it means in regard to a life insurance policy. We’ll also explore the different types of insurable interest so you will understand clearly the importance.

insurable interest Life insurance really is misnamed. It should be referred to as, “Love Insurance”.  Because let’s not kid ourselves, it is your loved ones you are protecting when you purchase a life insurance policy today, not yourself, right? The benefits of life insurance are for your family so that they will not suffer if somthing were to happen to you!

Take a minute right now and think.

Think about the tremendous impact your paycheck on Friday means to those you love the most.  Your paycheck (YOU!) is protecting your loved ones home, their future education, their lifestyle, their friends, the clothes they wear, the sports they play, their sports team coaches, etc. This list is truly endless. All these different life events will be affected immediately if there is no paycheck next Friday. Or, for that matter, any Friday thereafter.

Believe me, and this is an understatement, your family will remember you forever that you protected them with a sound life insurance policy. They will thank you every day of their lives for protecting them and not leaving them broke and possibly homeless.

Think it can’t happen to you? Then please, do not watch the news. “Stuff” happens, every day, unfortunately.

What else on earth offers you and your family so much peace of mind for so little as life insurance protection?  Your cell phone? Nope. Your cable TV bill? Nope.

Imagine you walked out of your family’s home, kissed your spouse and your kid’s goodbye in the morning, and never returning due to a tragic accident while driving to work?  This happens every day, many times a day.

Besides the obvious initial emotional trauma, your spouse and your children will experience financial devastation as well. Friday paychecks gone in the blink of an eye. An inexpensive term life insurance policy will protect those you love the most with tax-free proceeds payable quickly in one lump sum. It will keep your loved ones in the home that you selected for your family. It will help your family remain stable while they try their best to get emotionally adjusted.

However, because life insurance is such a wise financial strategy for your family, there are some limitations to purchasing a policy.  Don’t worry. We will go over the details in this article.

You can get a quick and free life quote by completing the form on the righthand side of the page. Getting a life quote will give you a general idea of the cost of your policy and to see what amount works in your budget. Remember, ANY life insurance is much better than no life insurance.

Requirement #1 When Purchasing a Life Insurance Policy

life insurance insurable interestA critical part of your life insurance application is the insured (you) must provide a beneficiary; this is the person who will receive the tax-free life insurance proceeds (the death benefit) when the insured passes. The life insurance proceeds are received in one payment and is currently tax-free. Not too many things in life are tax-free. Life insurance is one of them!  People have literally purchased a life insurance policy and within a month have passed away. Their family received the full death benefit! Once you are approved, you are protected immediately.

The vast majority of people purchase a life insurance policy because they wish to provide their loved ones with cash to maintain their lifestyle in the event they have an untimely death.

When applying for life insurance coverage, it is typically required that the beneficiary have an insurable interest in the person who is being insured.

What Exactly Does Insurable Interest Mean?

Insurable interest is present when an individual gets a financial or other type of benefit that is based upon the continued existence of the insured. Therefore, an individual has insurable interest in another when the death of the insured would cause the surviving person to have financial or other types of hardship or loss.

With regard to a life insurance policy, an insurable interest is based on a relationship whereby there is a common interest in another person continuing to live or a financial loss that would result at that person’s death. Therefore, in order to insure the life of an individual, an applicant for life insurance coverage must have a greater financial concern in the insured living than in them dying.

Having an insurable interest refers to the fact that a policyholder must establish that he or she has a financial interest in the person or property that is being insured. Specifically, the policyholder must face the possibility of a personal risk or loss and have a legitimate financial interest in preserving the life that is being insured. In addition, the insurance coverage that is being applied for should not constitute a personal gain for the policyholder.

It is required that the insured have an insurable interest in any life or property that will be covered in a life insurance policy.

NOTE: A  life insurance policy that does not constitute insurable interest is considered to be void, as well as illegal.

This is because the policy would be considered a wager and could possibly even lead to intentional destruction or harm.

Furthermore, even if it is deemed that an applicant for insurance has an insurable interest in the insured, the consent of the person to be insured is still required before a policy can be issued. The only exception to this is when a parent purchases insurance coverage for a minor child. For example, you cannot purchase life insurance on your Mom if Mom does not agree to the purchase.

When an applicant for insurance is the same person who is being insured, there is no doubt that an insurable interest exists. This is because individuals are presumed to have an insurable interest in their own lives.

Let’s look at more examples on an insurable interest. Based on common laws in a majority of states, an insurable interest is recognized in another person in the following circumstances:

  • In yourself
  • Any individual that you depend on for financial assistance or educational needs. (Spouse, parent, children, business partner)
  • If an estate has a vested interest in your life for its ongoing viability.
  • Any individual that has a legal obligation who, upon death, would still be obligated to pay the outstanding claim. Examples include cash debts, property mortgages, or services not completed. A death does not eliminate prior debt obligations.
Prior to applying for life insurance coverage, it is important to understand who – or what – may have an insurable interest in the individual who is being insured, as this could have a bearing on the acceptability of the beneficiary or beneficiaries that are chosen.

Common Sense and Insurable Interest

Let’s say you are walking your dog down your street and your elderly neighbor is at her mailbox. You say “hello” and she says ask you, “How are the kids doing?” You reply, “All good, thank you for asking, enjoy your evening.”

You continue walking down the street when an idea pops into your head. What if I purchased a life insurance policy on Mrs. Edwards, my neighbor? After all, she is 78 and certainly cannot live much longer. I think I’ll call my broker when I get back home.  This is a good example of a person NOT being an insurable interest and thus, no life insurance policy may be purchased on your neighbor’s life with you as the beneficiary. Why not you ask? Because you have no financial loss in the event of your neighbor passing away. Her ultimate passing will not cause you financial hardship; thus, you have no insurable interest in your neighbor’s life and cannot purchase a life insurance policy on her life.

A good example of an insurable interest is your Mom or Dad. Without a doubt if you are financially helping your parents out with medical bills or plan on paying the cost of their funeral you will be certainly allowed – and very wise — to purchase a life insurance policy on one or both of your parents to help with any debts you may incur and to pay their funeral and final expenses.

Not many of us have an extra $12,000 lying around to pay for a funeral. Life insurance certainly is a wise vehicle to use to fund this large bill that surely will be coming due someday for all of us.

Additional Types of Insurable Interest

It is critical to understand it is not only family and relatives that may have an insurable interest in a life insurance policy. The law clearly states that an insurable interest may not have to be “specifically proven”.

In numerous states, there are instances when an insurance interest is automatic.

Below are some excellent examples:

  • Should the insured have debts or outstanding loans, the lenders and creditors have an insurable interest.
  • An insurable interest exists that include relationships based on economic dependency, and most commonly, love or affection or related by law.
  • If a death or disability would cause a financial hardship to one’s employer or business entity, an insurable interest exists.
  • If you have a business partner you most certainly have an insurable interest in each other.
About Jack D. Davis at InsuranceScored.com
About Jack D. Davis at InsuranceScored.com

Jack D DavisBorn and raised in a quiet suburb of Philadelphia, PA, the youngest of nine children, son of two wonderful parents, Jack developed his work ethic early on. While attending West Chester University, he volunteered to join the US Army Reserves for a six-year enlistment. Attending college during the day, working evenings, and fulfilling his military obligation on various weekends, Jack learned the value of hard work and time management. After graduating from college (BS in Business Management), he began working as a sales representative for a Fortune 100 company and honed his marketing skills. In 1985 Jack started his financial planning career as an agent with Mutual Benefit Life.  After Mutual Benefit Life ran into financial difficulties, Jack decided to “go it alone”. His company, “Eagles Soar Enterprises, LLC.” successfully grew for almost 30 years. Jack’s skill-set is understanding and recognizing the personal needs of families and business owners. His patience in explaining the numerous options available is greatly appreciated by his clients. Jack agrees that life insurance is a difficult topic and people are rarely “excited” about discussing the subject. When Jack was 23 he witnessed firsthand how important life insurance is when he lost his Dad to cancer. Jack’s Mom used the life insurance proceeds to help minimize the financial loss.  Jack recognizes how critically important proper insurance planning is to the surviving spouse, business partner and, most importantly, the children of his clients. In his free time Jack enjoys playing tennis, horseshoes, ping pong, exercising, reading and attending Philadelphia Eagles football games. Jack has two wonderful children and currently resides in beautiful St. Petersburg, FL. Questions? Call Jack at 1.800.277.3098 or email: info@jackddavis.com

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