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Life Insurance Basics

Insurable interest is a safeguard against fraud

Safeguards like insurable interest are designed to prevent the purchase of a life insurance policy on the life of someone with no relation or connection to the buyer.

Insurance companies have processes to help protect against this fraudulent act

It may seem like something out of a mystery novel -- someone purchasing a life insurance policy on your life without you being aware. Life insurance companies have certain processes and safeguards that would make it extremely difficult for this to happen. Here's why:

For someone to purchase a life insurance policy on you, they must have what's called an insurable interest. This means that the person who wishes to insure your life would suffer genuine financial stress if you were to die. Some common examples of an insurable interest can include a child or grandchild, a spouse or former spouse, a disabled adult child, a domestic partner or live-in, and even a business partner. So for example, under normal circumstances, your neighbor wouldn't be able to show a financial interest in your life and therefore couldn't purchase a policy on you.

Larger life insurance policies usually require specific medical information on the people they insure during the underwriting process. This generally means that you would be required to sign a release of your medical records or even undergo a medical examination when applying for coverage. That would be next to impossible for someone other than you to pull off. And as a rule, life insurance policies generally require the insured's signature on all final paperwork - even for applications that are taken online or over the phone. In fact, many policies that typically wouldn't require a medical exam (such as no exam life insurance), will at the very least require your signature.

However, there are some exceptions to the signature rule. For example, a parent can buy life insurance on a baby or young child. In this instance, the insurance company wouldn't require the child's signature, making it possible that as an adult, the child is unaware of the policy's existence. Another exception could be a group policy or policy rider through your job that doesn't require your spouse's signature in order to sign him/her up for coverage. This practice is common among group life insurance policies.

It's not easy for someone to purchase a policy on your life without your knowledge. Since forging your signature is considered a criminal act of fraud and punishable by law, if the fraud were ever discovered, the insurance company would require the money to be paid back.




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