Proof of insurable interest, along with consent from the insured, is required to purchase a life insurance policy on another person.
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In life insurance, a person has an insurable interest in another person when the death of that person would cause a financial, emotional or another type of loss. Insurable interest can be present in many situations like marriage, but it is evaluated by the insurance company during the application for the policy and before payment of the death benefit.
What is Insurable Interest?
You have an insurable interest in something if you would suffer some kind of loss if that person or property were to be lost or damaged. Furthermore, you would benefit financially from that person or property's continued existence. For this reason, it would make sense for you to purchase insurance on it so you can continue to receive those benefits.
What is Insurable Interest in Life Insurance?
You can't take a life insurance policy out on just anyone. In order to purchase a policy, “insurable interest” must exist. In the case of a life insurance policy, the owner of the policy must always have an insurable interest in the life of the insured. Also, if the owner of the policy is not the beneficiary then the beneficiary named in the contract would also need an insurable interest in the insured person.
Insurable interest is present in life insurance when an individual receives a financial or another type of benefit from the continued existence of the person insured. Thus, if the person insured were to pass away, the surviving person would experience a financial loss or other hardship.
For example, say you wanted to buy a life insurance policy on person A (Bob) and name the beneficiary person B (Sam). In this example, both you and Sam would need to have an insurable interest in the life of Bob to purchase the policy.
How to Prove Insurable Interest
In life insurance, proof of insurable interest is required during the application and purchase of a policy. Life insurance is a tool used to make you whole again following the financial loss of someone. In theory, some people would be tempted to purchase a life insurance policy on a random person to receive profits if that person were to die. This is why the principle of insurable interest was created to ensure that life insurance was used properly.
Insurable interest is a nonnegotiable aspect of life insurance policies and without an insurable interest, the policy can be void or denied. It is also the duty of the policy owner to prove that they have an insurable interest in the insured party. Proof must be presented at application along with at the end of the policy when the insured has passed away.
To confirm that an insurable interest is present, a life insurance company will usually talk to the policy owner, beneficiary and insured. They will investigate the relationship to the proposed insured and evaluate if there is an insurable interest. If an insurable interest is not found, the policy would be denied at the application or the death benefit would not be paid out.
When Does Insurable Interest Exist in a Life Insurance Policy?
You are always considered to have an insurable interest in your own life and, therefore, you can purchase life insurance on yourself. In this case, you would be the policyholder and the insured. Furthermore, the beneficiaries of the policy would not need to prove an insurable interest in you, as it is presumed that you would name beneficiaries who want you to live a long and healthy life.
Insurable interest also extends to your direct dependents and relationships of blood and marriage. This can include:
- Husbands and wives
- Children (including adoption)
- Grandparents and grandchildren
- Brothers and sisters
Above are all examples of direct blood relationships where insurable interest is always present. Insurable interest can also exist in business and creditor-debtor relationships.
Business relationships create an insurable interest if you have a financial dependency on the existence of the insured. For example, say you start a business and hire Alex to run it. In this case, you would have an insurable interest in the life of Alex, because if he were to pass away you would experience a loss of profits for your business. This is known as business life insurance and is a common practice. Often, corporations take out key man life insurance on their officers, while business partners can purchase life insurance contracts on each other.
Creditors and credit companies are allowed to take out life insurance policies on their debtors. In this case, with consent from the debtor, the company could take out a life insurance policy equal to the amount owed.
When Does Insurable Interest Not Exist?
Insurable interest generally is present in blood relationship but would not exist in the following scenarios unless there is proof of financial dependence:
- Aunts and uncles
- Nieces and nephews
- Stepchildren and stepparents
Say, for example, you have an elderly neighbor who is 90 years old. You consider taking out a life insurance policy on your neighbor as she does not have many more years to live. This would not be a situation where an insurable interest would be present, as you would not suffer a financial loss from the death of your neighbor.
Can I buy Life Insurance on my Parents without their Consent?
You may decide to buy life insurance for an aging parent, as there can be many costs if that parent were to pass away. It is possible to purchase life insurance on a parent, but the parent must consent to sign off on the purchase of the policy in writing.
For example, funeral services cost approximately $8,000, on average. If you do not have this much money in savings, you could use life insurance as a way to fund an expensive but necessary cost like this.
Can I buy Life Insurance on my Child's Mother or Father?
As long as you can demonstrate and prove that you have an insurable interest in the other person, such as an ex-spouse or co-parent, then you would be able to purchase a life insurance policy on them. This would require that you demonstrate that the loss of that person would impose financial hardships on you or your child. For instance, if your child's father, whom you're divorced from, died, you might experience a lack of future child-support or alimony payments. This could constitute an insurable interest, so you could purchase a life insurance policy, in which you are the beneficiary and your ex-husband is the insured.