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6 Minute Guide to Insurable Interest in Life Insurance

by Seth
Insurable Interest in Life Insurance

Most probably, you would have heard the word “insurable interest” while going through life insurance. Have you ever wondered what insurable interest is and why do you need it?

Primarily, insurable interest is relatable to a life insurance policy. When a person dies or becomes helpless, the level of loss someone experiences is referred to as insurable interest. There is a chance that you might not know whether you have an insurable interest in someone or not. Therefore, you should better know about insurable interest in life insurance.  

We will sum up all about insurable interest in these pages. You will come to know the meaning of insurable interest, its examples, and how we can prove it. Moreover, we will guide you when insurable interest exists and when not.

You might think the term insurable interest is complicated, but it has vast applications with a simple knowledge in reality.

Insurable Interest in Life Insurance

What is Insurable Interest?

Insurable interest refers to the type of investment that prevents individuals from hazards of financial loss. People who have insurable interests assure that a person or property via a policy that enhances loss risks. For example, someone is never allowed to get insurance for an aged lady just because she is old.   

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Insurable interest is considered as a significant need to issue a life insurance policy. These policies make an individual or any entity protected and valid against harmful acts and losses. The ones who are not subjected to failure if they don’t have any kind of insurable interest. As a result, an individual cannot purchase an insurance policy if he/she is not subjected to risk loss.  

You should know what is insurable interest in life insurance. In life insurance, we can say that insurable interest is the basis of all the insurance policies. You cannot take an insurance policy on anyone. Moreover, if you want to purchase, there must be an existence of insurable interest.

Furthermore, insurable interest can be present in life insurance only when an individual gets a financial benefit from the insured person. Hence, if the insured person passed away, the individual will have to experience hardships or financial loss.

Examples

If you talk about life insurance, blood relations or family members are considered represented and immediate interest takers. Most common and accepted insurable interest examples are:

  • Aged parents
  • Brothers or sisters
  • Engaged couples
  • Disable or special adult children
  • Wife or husband
  • Children and grandchildren
  • Financial dependents, if any 

You cannot consider other relatives, for instance, cousins, nieces, etc. As eligible interest takers. If there is financial dependency or any kind of hardship, and you can prove it, you shouldn’t have trouble.   

Other possible insurable interests which can be proved are:

  • Suppose if a child got an insurable interest when his father was alive.
  • Moreover, in the life of a co-partner, a business partner can have an insurable interest.
  • In the life of a principal debtor, a surety can have an interest.
  • In addition, a creditor gets an insurable interest in the life of his debtor.

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However, in some cases, insurable interests can not be easily proved. Like a relative (cousin, niece) might find it challenging to prove their insurable interest in a relative. Only a relative who is financially dependent on a person can prove to have an insurable interest.

One more insurable interest example that cannot exists is when a person tries to buy life insurance on a stranger. However, these are rare cases because to prevent such frauds, organizations and companies use insurable interest.  

Types of Insurable Interest

According to the features of insurable interest, it is divided into two categories which are:

  1. Insurable interest in one’s own life and
  2. Insurable interest in others’ life.

In one’s own life, insurable interest doesn’t need any kind of verification to prove it. There is a need for insurable interest in one’s life to prevent the loss of future gains, which might occur due to sudden or premature death.

However, some people have an insurable interest in a third party. Some cases are not necessary to be proved. For example, if a wife has an insurable interest in her husband’s life, it is legal because he is bound to support his wife. 

Furthermore, in business relationships prove is required for an insurable interest.

If a person has an insurable interest, he/she can ensure anything. There are primarily two types of insurable interest, which are:

  1. Property insurable interest
  2. Life insurable interest

We will discuss the types of insurable interests one by one. Have a look:

Life Insurable interest

It is the reality that every company needs employees because it is hard to manage without them. They work for the development of the company. 

Hence, the company itself buys a life insurance policy in the name of particular employees. A big reason behind the fact is sometimes there is a chance of the sudden demise of an employee. This can cause serious situations for the company. 

Firstly, you have to show the company that how important an employee is to the organization. The company will permit you to buy life insurance only if you satisfy the company that employee means a lot. Hence, you will need an insurable interest to limit the consequences after the demise of your employee. 

Property Insurable Interest

You should buy life insurance because Insurable interest will always protect you from hazards or potential threats. Property can be furniture, inventory, or equipment. In case if there is damage to the property, insurable interest will give protection. You might have bought the land. There is a risk of earthquakes, floods, and theft, etc. For the safety of these damages, one can get property insurance.

You must have to ensure the company that you are the owner of a particular company. Hence, you can get property insurance. The company will issue your policy by seeing your property papers. At times, there is a chance of more than one owner of a particular company. Therefore, to get the policy paper valid, both owners must sign.

When is it Required?

You can consider policies without an insurable interest as illegal and invalid. Consequently, to have an insurable interest is an essential requirement for assured people. The only thing which makes a life insurance contract valid is an insurable interest. In early life, insurable interest was not considered to be useful. However, now laws are defined to protect the insurance against individuals who indulge in other people’s lives.

In case if insurable interest is invalid, it should not be considered a problem for various people just because insured people are always their loved ones. There is no need to provide insurable interest for spouses and children because they have evident interests. 

However, in some cases, you are required to submit claims to show the beneficiary’s financial interest. For example, suppose you are the last individual who remained behind and thought to cover funeral costs. These costs may be expensive, so you need to submit a case for that. 

It is not always right that you only require an insurable interest when you buy a policy. For example, if your beneficiary of the policy is your spouse and then you divorce after seven years. Until you change the beneficiary name even after your death, your spouse will still be the recipient of the death benefit.  

The features of insurable interest are also found when you name whatever beneficiaries you want for the policy. For example, it is not always worth it that you can only have an interest in yourself. Well, you are allowed to name whatever beneficiary while buying your policy. Most of the companies usually reject the people who they consider ineligible of being beneficiaries.

Frequently Asked Questions (FAQs)

How do you determine insurable interest?

An individual has an insurable interest if he has suffered financial or any loss due to someone else’s death. 

What is an insurable interest in life insurance?

Insurable interest in life insurance is considered as a type of investment that prevents individuals from financial losses. Or it prevents insurance frauds.

What is an insurable interest example?

For example, a disabled child may have an insurable interest in father.

What is an insurable interest beneficiary?

Insurable interest beneficiary refers to a person who has a financial interest in the life of a person. A family member or a financially dependent person can be a beneficiary.

Who has an insurable interest in a car?

A car, blood relations or family, or any relative who can prove has an insurable interest. 

What is insurable loss?

Insurable loss is something that is an unexpected event and occurs suddenly. This act can result in damage due to the failure of the asset.

Conclusion

Life insurances are designed for you and your loved ones to protect you from financial losses. Due to the loss of a person, a business or individuals behind would suffer a lot. For preventing them from any financial loss, insurable interest is provided to the assured person. 

Especially in life insurance, you and the insurer will have to go through fraud if you do not have insured interest. If you are insuring any other person who is outside the family, you must document the relationship. At times it happens that you insure a business partner. Hence, you have to prove it to the company.

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