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Insurable interest exists when an insured person derives a financial or other

kind of benefit from the continuous existence of the insured object. A person has
an insurable interest in something when loss-of or damage-to that thing would
cause the person to suffer a financial loss or other kind of loss.

For example, if the house you own is damaged by fire, the value of your house
has been reduced, and whether you pay to have the house rebuilt or sell it at a
reduced price, you have suffered a financial loss resulting from the fire. By
contrast, if your neighbor's house, which you do not own, is damaged by fire, you
may feel sympathy for your neighbor and you may be emotionally upset, but you
have not suffered a financial loss from the fire. You have an insurable interest in
your own house, but in this example you do not have an insurable interest in your
neighbor's house.

1. Each individual has an unlimited insurable interest in his or her own life, and
therefore can select anyone as a beneficiary.

2. Parent and child, husband and wife, brother and sister have an insurable
interest in each other because of blood or marriage.

3. Creditor-debtor relationships give rise to an insurable interest. The creditor


can be the beneficiary for the amount of the outstanding loan, with the face
value decreasing in proportion to the decline in the outstanding loan amount.

4. Business relationships give rise to an insurable interest. An employee may


insure the life of an employer, and an employer may insure the life of an
employee. See also Benefits of Business Life and Health Insurance (Key Person
Insurance): Key Employee (Key Man); Partnership Life and Health Insurance.

Insurable interest must exist at the inception of the contract, not necessarily at the time of
loss. For example, because a woman has an insurable interest in the life of her fiance, she
purchases an insurance policy on his life. Even if the relationship is terminated, as long as
she continues to pay the premiums she will be able to collect the death benefit under the
policy.
If you want to buy a life insurance policy on someone else's life, you must have
an interest in that person remaining alive, or expect emotional or financial loss
from that person's death. This is called an insurable interest. Without this
requirement, it would be very easy to make a living by purchasing life insurance
policies on elderly strangers, and then collecting the proceeds when they died.
The insurable interest requirement also prevents people from buying a life
insurance policy on someone and then causing or hastening that person's death.
When you buy insurance on your own life, you are assumed to have an insurable
interest. If you are buying a policy on someone else's life, an insurable interest

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can typically be established if you have a sufficiently strong relationship with that
person based on blood, marriage, or monetary interest. To put it bluntly, they
have to be worth more to you alive than dead.

Husband-wife relationships and parent-child relationships are almost always


sufficient to create an insurable interest. In addition, grandparent-grandchild
relationships and sibling relationships are frequently considered sufficient for
establishing an insurable interest. The ties between cousins, aunts/uncles and
nieces/nephews, and other more distant relatives don't automatically give rise to
insurable interests because their emotional and financial bonds may be less
strong.

Certain relationships founded on monetary interests can also create insurable


interests. For example, a creditor is considered to have an insurable interest in a
debtor's life. Even though death doesn't extinguish the debtor's obligation to
repay a loan, the creditor faces potential harm if the debtor's estate cannot repay
the loan. Other examples include the relationship between a business and a key
employee, or the relationships among partners in a partnership or stockholders in
a closely held corporation. The death of a CEO, general partner, or active
stockholder can cause financial disruption to the business and harm the other
business owners.

The insurable interest must exist at the time you enter into the life insurance
contract, not at the time of the loss or harm. In other words, you must have an
insurable interest at the time you take out the policy. However, the insurable
interest generally doesn't have to remain at the time of that person's death.

To stop your good neighbor Sam from taking out a life insurance policy
on you and then killing you to get the life insurance money, your
neighbor, as the purchaser of the insurance policy, must have an
insurable interest in the life of you, the person being insured at the
time of application. In dealing with life insurance, a person is deemed
to have insurable interest when the purchaser has a reasonable
expectation of profit or benefit from the continued life of the insured.

Every state requires that an insurable interest exist at the time of


application. Policies issued on lives where there is no insurable interest
are regarded as void from the beginning because they are against
public policy. They are against public policy because they encourage
murder for profit. If there was no insurable interest requirement, some
people would be tempted to purchase life insurance policies to collect
the death benefit by killing the insured.

A person is always considered to have an unlimited insurable interest


in his own life and health. Therefore, the beneficiaries of the policies
that an insured purchases on his own life do not need to have an

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insurable interest. It is presumed that the insured would name as a
beneficiary only people who want the insured to live a long and
healthy life. A person, therefore, can obtain as much insurance as he
wishes on himself – subject to other limits an insurance company
might have. For example, insurance companies commonly limit the
amount of insurance they will place on a person to that appropriate to
his income and life style.

Determination of insurable interest

Courts and state laws have established guidelines for those persons
and entities presumed to have insurable interest. They fall into three
general categories – relations by blood or marriage, business
relationships, and creditors.

Blood or Marriage: People generally have an insurable interest in the


lives of their spouses and dependents. Based on this relationship, the
general rule of thumb is:

Insurable Interest
No Insurable Interest
Husbands and wives
Other relatives by marriage
Parents and children
Nieces and nephews
(including adopted children)
Cousins
Grandparents and grandchildren
Uncles and aunts
Brothers and sisters
Stepchildren and stepparents
Engaged couples (some states)

Business Relationship: An insurable interest may be created in an


otherwise non-insurable interest relationship by the creation of a
financial dependency or a business relationship between the parties.
For example, an uncle may be deemed to have an insurable interest in
a nephew because the uncle’s business is run by the nephew and the
business, as run by the nephew, is making a lot of money for the
uncle.

One who receives economic benefit from the continued life and good
health of another has an insurable interest in that person’s life. For
example, employers can take out key person life insurance on key
employees, corporations can take out insurance on the lives of their
officers, business partners can take out life insurance on each other.

Creditors: Creditors are allowed to take out life insurance on the lives
of their debtors, with the debtors’ consent, up to the limit on the debt.
Mortgage and credit insurance are examples of this type of insurance.

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Insurance companies have a duty to exercise reasonable care in
determining whether insurable interest exists and whether the consent
of the insured has been obtained. If they don’t, they may be sued.

For more information on life insurance contracts, read our section


on Life Insurance.