What is insurable interest in life insurance?
You buy life insurance so that the people who depend on you the most won't struggle financially in the event you were to unexpectedly die. That being said, one of the key elements of a life insurance policy is your beneficiary - the person or entity named on your policy to receive the proceeds when you die. A beneficiary can be a person or a business. In any case, a beneficiary must have an insurable interest in the person who is being insured if they are purchasing insurance on that person's life. But what does that mean?
What is insurable interest?
With regards to life insurance, someone having an insurable interest in you means that they would experience financial loss and hardship should you die. Therefore, for someone to purchase an insurance policy on your life and be considered the beneficiary (making them beneficiary-owner), they must be able to demonstrate an insurable interest. Do note that even with an insurable interest, anyone who wants to insure your life would also require your consent before a policy could be issued. There are some exceptions, such as a parent buying coverage for a minor child.
Insurable interest examples
State laws can differ, however, generally the following individuals would be considered having an insurable interest in your life.
- Your spouse or former spouse
- Your children or grandchildren
- A special needs adult child
- An aging parent(s)
- An employer (under certain arrangements)
How to prove insurable interest
Prior to offering coverage, the insurer will take steps to verify insurable interest. These steps may include requesting identification from the involved parties and will also likely involve a phone interview, where the insurer inquires about relationships and insurable interest. If you are unable to prove insurable interest, the insurer may not issue the insurance policy.
When must insurable interest exist in a life insurance policy?
Always, but it's a requirement that applies to the owner with the person being insured. Therefore, if you would like to financially protect someone that does not have an insurable interest in your life, you can purchase a life insurance policy on your life, naming that person as the beneficiary (the most common arrangement). This is because a person (owner-insured) is always considered to have an insurable interest in their own life and an owner-insured can generally name anyone they choose as beneficiary. It is, however, illegal for a person to purchase life insurance on the life of a person with whom they have no insurable interest.