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Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles Update For a party to seek insurance against a potential loss, the insured must have some form of interest in the insured property or be subject to a particular loss from an occurrence or event affecting the insured property or individual. This is known as having an insurable interest. An insurable interest may be any form or legal or equitable interest in the property, including security interests in the property as collateral. Individuals may have an insurable interest in the life of other persons, but the individual whose life is subject to the policy must agree to such coverage. In some situations, contractual rights or the potential to suffer damages from non-performance of a contract may give rise to an insurable interest. This is the case for professional liability coverage. Note: An exception exists to the insurable interest requirement for certain types of financial instruments. These instruments effectively insure against an occurrence in which the holder of the instrument has little or no financial interest. Example: One person cannot take out a life insurance party on a complete stranger without that persons permission. There must be some special relationship between the individuals to justify the policy. This could be a family or business relationship. In any event, the insured individual must generally agree for the insurer to issue a life insurance policy to a third party. In health and life insurance policies, the individual applying for the policy must have an insurable interest in the insureds life at the time that the policy takes effect. In property insurance contracts, the individual applying for insurance must have an insurable interest in the property at the time of loss to the covered property. Next Article: Common Characterizations of Insurance Back to: INSURANCE LAW What is an Insurable Interest in a Sale or Lease Contract? Generally, the purchase or lessor in a sale or lease contract acquires an insurable interest in the subject of the contract upon execution of the agreement for lease or purchase. Related Topics
Discussion QuestionWhy do you think insurance contracts require that an individual have an insurable interest? Can you think of contracts that are similar to insurance policies that do not require a party to have an insurable interest? Hint: Think of the 2007 economic recession. Practice QuestionAmy is a huge fan of a popular singer, Justin. Though she has never met him, she would be distraught if anything were to happen to him. In the event of his untimely demise, she wants to make certain that she would be able to create a shrine and pay homage to the singer. Can Amy take out an insurance policy covering Justin's life? To purchase any life insurance policy, you must have insurable interest. To have insurable interest, you must rely on the services or finances of the insured individual. If the insured individual were to pass away, you would experience hardship or have to cover lost funds. Insurable Interest Definition An individual has an insurable interest of another person if such individual has an expectation of advantages through the continued life, health, and safety of that other person and consequent substantial loss by reason of the death, injury, or disability of that other person. Source: The Florida Legislature For example, if your wife covers most of the family’s bills, you will experience financial loss if she were to suddenly pass away. Therefore, you have insurable interest. If you don’t have a relationship with the insured or wouldn’t suffer any emotional or financial losses if the insured passed away — you do not have insurable interest. Examples of When Insurable Interest ExistsIf you are purchasing a life insurance policy for yourself, you automatically have insurable interest. If you are purchasing life insurance for someone else, there are common scenarios when you likely have insurable interest. Relationships When Insurable Interest Exists SpouseIf you watch your children while your spouse works, you both have an insurable interest with one another. If you were to pass away, your spouse would have to hire a nanny to care for the children. If your spouse passed away, you’d need to cover their lost salary.Family MemberIf a close family member provides services or financial aid to you, such as a sister caring for you as you recover from cancer — they would have insurable interest.Financially dependent ex-spouseEven if you’re divorced, if you rely on funds from your ex-spouse, you have insurable interest. For example, if your wife pays child support, you will suffer financial losses if she were to suddenly pass away. Employer or business partnerIf you have a business partner, you could risk financial and labor loss if they were to pass away. In some cases, you can have insurable interest. According to the Florida Legislature, a business entity related to insurable interest includes but is not limited to a joint venture, partnership, corporation, limited liability company, and business trust. When does insurable interest not exist?Insurable interest does not exist between individuals with no financial or emotional dependence. You do not have an insurable interest with a stranger, or even some family members. Just because you are blood related, doesn’t mean you have insurable interest. There must be a dependency or loss if the insured were to pass away. For insurable interest to exist in a business relationship, there must be evidence of financial ties between the policyholder and the insured. Simply being someone’s employer or partner doesn’t mean you automatically have insurable interest. Comparing When Insurable Interest Does and Doesn’t Exist Scenario 1 You are Janet’s sister, but you don’t ever see her.You do not have insurable interest.Scenario 2 You are Amy’s wife. You live together.You do have insurable interest.Scenario 3 Ryan is your employer. You both work at Target.You do not have insurable interest.Scenario 4 David is your business partner. You just opened a law firm together.You do have insurable interest. Proving Insurable InterestTo prove insurable interest, you can gather a written statement or declaration from the person you’re trying to get insured. The life insurance company may also request to speak with the individual or ask for further documentation. For example, if your ex-spouse covers the majority of the bills, having a bank statement would help prove your insurable interest. You’ll need ample information to be able to take out a life insurance policy on anyone, even if that person is a family member. You’ll need a signed consent form, along with their medical history. Having information ready with written consent will help prove insurable interest. Why Insurable Interest Is ImportantIf insurable interest wasn’t required with life insurance policies, anyone could take out a life insurance policy on anyone. People could be scammed or victimized. For example, one could take out life insurance policies on a sick older adult in hopes of cashing out a death benefit. One could even be incentivized to take a life insurance policy out on a neighbor or stranger, only to hurt them in hopes of receiving a benefit. Generally, if insurable interest did not exist, good people could be tempted to abuse life insurance resources and endanger others. Frequently Asked Questions About Insurable InterestAt what time must a policy owner have insurable interest? There must be insurable interest at the time the policy is purchased. For example, if you’re married, you’ll likely always have an insurable interest. But if the person you’re looking to insure is your business partner, you will only have insurable interest while you have financial obligations to one another. Who has insurable interest in life insurance? Whoever will face financial or emotional hardship if the insured passes away is the individual with insurable interest. Having insurable interest allows you to purchase a life insurance policy. What is an insurable interest in insurance?An entity or person is said to possess an insurable interest when the destruction, loss, theft, or damage of the property, person, or event could result in a monetary loss or another type of hardship for that entity or person.
What are examples of insurable?The most common examples are key property damage risks, such as floods, fires, earthquakes, and hurricanes. Litigation is the most common example of pure risk in liability. These risks are generally insurable.
When must an insurable interest exist for a life insurance policy?When buying life insurance, insurable interest must exist at the time the life insurance policy is purchased. If the policyholder and insured person are different, both the policyholder and named beneficiary must have an insurable interest and prove financial loss and hardship if the insured were to pass away.
Does life insurance have insurable interest?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.
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Examples of insurable interest in life insurance
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