What is Insurable Interest?

Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

Can I buy a life insurance policy on my neighbor so that I can collect the benefit if he dies? Let's investigate the insurance concept of insurable interest to find out. We will look at who is eligible to purchase insurance on another person.

Insurable Interest

Ned is an insurance salesman and is often approached by a spouse who wants to purchase a life insurance policy on his or her partner. Let's consider Jane, who wants to know if she can buy a policy to cover her husband, Fred, since he has been slow to do it himself. This example will illustrate the concept of insurable interest. Let's see how this concept works in the insurance industry.

Definition

Simply put, insurable interest means that the beneficiary, or person benefitting from the proceeds of the insurance policy, has a financial tie to the insured person. Since Jane is married to Fred she benefits from his income, and would be affected financially if he died. Without an insurable interest, an insurance policy is considered void and illegal.

An insurance company that issues a life insurance policy will want to make sure that the person purchasing the policy has a continued benefit and interest in the insured person continuing to live. For example, it would be unwise for the company to write a policy that would incentivize the death of a spouse. A balance must be achieved between protecting against the financial loss associated with a person's death, and creating the moral dilemma of a financial gain from that person's death.

Eligibility

Ned can determine if a potential buyer meets the eligibility standard for an insurable interest by establishing a financial or dependency relationship between the buyer and the insured person. Immediate family, such as spouses, or adult children who depend on their parent to cover education costs, are common examples.

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