Insurable Interest: An Important Safeguard

What’s stopping just about anybody from taking out a policy on you, giving you a little “push” (helping you towards your demise) and then claiming the life assurance proceeds? When life insurance policies were first offered in the market, just about everyone could take out a policy on someone else’s life. The result? Murder for profit, which is quite an unattractive prospect, especially if it’s your life on the line.

However, the concept of insurable interest was introduced to safeguard against unscrupulous individuals from taking a policy on someone they knew had a medical condition or whose life is in imminent danger.

What Is Insurable Interest?

To put it simply, someone has an insurable interest in your life if that someone has a reasonable stake or interest in your continued life and wellbeing. There is a relationship where the person benefits (emotionally and/or financially) more if you continue living than when you are dead.

Insurance companies require someone taking out a policy on someone’s life to have insurance interest at the time the policy was bought.

Who Has Insurable Interest?

For starters, you would have insurable interest in your own life and wellbeing. So you can buy a life assurance policy for yourself and name any beneficiary you wish.

Aside from this, persons who have insurable interest on your life are categorized into three classes:

  • Loved ones or Relations.

    These are people who are bound to you either by blood or marriage. This includes your parents, spouse, children, siblings, grandparents and grandchildren. However, this does not include in-laws or other relatives by marriage, cousins, uncles and aunts, nieces and nephews as well as stepparents and stepchildren.

    It is assumed that your loved ones will suffer a huge emotional loss at your death.

  • Business affiliation.

    Business partners or valued employees are deemed to have a special relationship due to a business’ dependence on these persons. For instance, if two friends are business partners and each one plays an important role in how the business is run and the business will suffer real financial loss at the death of a partner, then both partners have insurable interest on each other. The same goes for an employee who plays a valuable contribution to the company’s financial success.

    This means that employers can take out life assurance policies for their valued or key employees such as officers, managers, board members and others.

  • Creditors.

    Those who give out loans to you are allowed to take out a life assurance or insurance policy on your life up to the amount of your debt. This is why there is credit insurance (to cover credit card users) and mortgage life insurance (to cover people who take out a mortgage). This means that when the debtor dies, the creditor can receive the amount owed from the insurance.

The Insurance Company’s Role

The insurance company, when underwriting a policy, will take a close look at insurable interest and determine whether such exists at the time the policy was applied for. It is the insurance company’s duty to ensure this to safeguard against people taking out insurance on others on a speculative basis.

To protect your loved ones for less, fill the form on the right to get your life insurance quote.