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Life Insurance Basics

What you need to know about insurable interest

In order to purchase a life insurance policy on another person, a beneficiary-owner (a person, trust, or business) has to prove an insurable interest or financial dependency in the insured person.

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. But what does that mean?

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 wanting 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. 

State laws can differ, however, generally the following individuals would be considered having an insurable interest.

  • Yourself
  • Your spouse or former spouse
  • Your children or grandchildren
  • A special needs adult child
  • An aging parent(s)
  • Any person under a legal obligation to you for payment of money, services, or property and whose death or illness could prevent or delay such a payment or performance



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