What Exactly Is Insurable Interest?
Insurable interest is when you (or a group) have an economic stake in another person’s life or the continuation of a legal entity (such as a corporation, or organization) or asset. Insurable interest also arises when you have an interest in another person based on love and affection, assuming that there is a blood or legal link involved, such as via family or marriage.
- All insurance plans require that there be an insurable interest in the person or item being covered in order to be lawful and legitimate.
- Life and disability insurance are typically used to cover insurable interest in persons whereas property and casualty insurance may be used to protect physical things or intangible entities, such as a corporation.
- Insurable interest for life insurance is necessary when the policy is issued, but not after the covered person dies.
- Insurable interest inhibits individuals from wagering on the life of a person (or item) and seeking to benefit from their (or its) premature death.
Definition and Examples of Insurable Interest
Insurance firms utilize insurable interest to decide whether you or anybody else should be permitted to take out an insurance policy. For example, the insurance may be on a vehicle, a property, or someone’s life. If someone without an insurable interest were awarded an insurance policy on something they didn’t own or a person they didn’t care about it, the destruction of that object or person may benefit them financially.
As this might lead to the purposeful damage of property or even murder, insurers demand that you have an interest in keeping the item or life of whatever is being insured.
NoteThe owner of an insurance policy gets to designate the beneficiaries—the party that will get money if the property is destroyed or if the person is wounded or dies.
Frequent Examples of Insurable Interest
There are a variety of scenarios in which you could have an insurable interest in an object or person in your life. They include insurable interests in
- Property: Whether you have a car,a house, a boat, jewelry, or any other piece of property that you have a financial interest in, you have an insurable interest in that property. In other words, if it were damaged or destroyed, you would incur a loss—and insurance may assist reduce or eliminate that loss by reimbursing the expenses of repairs or replacement. A property-casualty insurance policy, such as a homeowners insurance policy, would be employed in this scenario to offer the required financial protection.
- Family members: If you are married, for example, and rely upon the income of your spouse to make ends meet, then you have an insurable interest in your spouse. Life insurance may be used to mitigate the financial loss that would follow if your spouse dies early. And, of course, the same applies for you: Life insurance may reimburse your spouse if you were to die early. Most life insurance companies will give coverage for any family member who has a financial stake in any other member, such as a parent, sibling, child, spouse, special needs adult child, or grandchild.
- Employees: If the operations or profitability of your company rely substantially upon a single employee or group of workers, insurance might decrease the damage should anything happen to them. Your organization can opt to obtain life and/or disability insurance coverage on a key employee or important workers. This would therefore enable your organization to satisfy its financial responsibilities until the covered person(s) had been replaced. A major firm may take out a substantial insurance on its CEO and board of directors for this purpose.
- Yourself: You are naturally assumed to have an infinite insurable interest in yourself, and thus you may take out an insurance policy on your own life and designate anybody you like as the beneficiary. For example, if you wish to leave an inheritance for your children, you may take out a life insurance policy to do so.
NoteLife insurance death payouts are virtually always tax-free to beneficiaries.
How Does Insurable Interest Work?
Insurable interest in this sense has nothing to do with generating interest as you may do with a bank account or fixed-income instrument. Assess if you would suffer financially from the loss of someone or something in your life or whether you’d lose money from a piece of property being destroyed. If you would, then you could have an insurable interest in that person’s, group’s, or thing’s ongoing survival. And that interest may be safeguarded through life and/or disability insurance, or property insurance.
A Common Requirement
All life insurance firms need the potential owner to verify insurable interest before providing a policy.
Insurable interest is essential in insurance contracts because it prohibits individuals from benefiting money from the loss of something to which they have no link. For example, you cannot obtain a vehicle insurance coverage on your neighbor’s automobile if you see that they are a dangerous or risky driver. You also cannot take out a life insurance policy on a stranger.
One-Time Approval for Life Insurance
Insurable interest only has to exist when a life insurance policy is originally issued. It does not have to continue after the policy is in place. For example, a spouse who takes out an insurance on his wife and identifies himself as the beneficiary might show insurable interest at the time of application. Yet if they get divorced and he remains the beneficiary, he will still earn the death benefit if his ex-wife dies (assuming the insurance hasn’t lapsed).
With property insurance, however, such as a vehicle insurance policy, insurable interest has to exist both when the policy is acquired and when any loss occurs.