Life insurance is an important financial tool that can provide a safety net for loved ones in the event of an unexpected death. Still, when purchasing life insurance, it's important to understand the concept of insurable interest and this will dictate who you can and can’t take out a life cover policy for.
What Is Insurable Interest?
Insurable interest refers to the interest one person has in the life of another person. In the context of life insurance, it means that the policy owner must have a valid reason for purchasing a policy on the life of another person. The policy owner would have to prove that it’s in their best interest for the other person to be alive, either for monetary or emotional reasons.
In addition, the insured individual would have to give their consent before any policy could be taken on for them. The only exception is when parents purchase a life insurance policy for their minor children.
In every case, insurable interest is important because it ensures that life insurance is used the way it should be – to protect the financial interests of the policy owner and their beneficiaries, not to profit off of someone else's passing.
Here Are Some Examples Of Insurable Interest
When it comes to family members, a spouse, child, or other dependent will always have an insurable interest in the life of the person who’s taking care of them. If the breadwinner were to die unexpectedly, it would have a significant impact on the financial well-being of the family. As a result, immediate family members are typically approved for insurable interest. It’s also easy to recognise both the financial interest as well as the loving bond between the insurer and the insured. Unmarried couples may also be able to prove insurable interest if they have wills or joint assets – like a property that they’ve bought together.
Business partners can also have an insurable interest in each other's lives. If one partner were to die unexpectedly, it could have a significant impact on the business's financial stability. Just bear in mind that the person paying for the policy would need the consent of the insured (the person being covered).
Last but not least, if you’re a creditor who is owed money by another individual – be it someone in your family, a friend or a business partner – you could also apply for life insurance cover on that person up to the amount that they owe you. Again, you’d need their consent.
The Bottom Line
When it comes to life insurance, insurable interest is a key concept so it’s important that you understand it. You need to prove you have a loving bond or a financial interest in the person to want to take out life cover for. Also, keep in mind that even if you’re the person paying for the policy, the insured still has the freedom to choose who they will list as a beneficiary (the person who receives the payout) and this doesn’t have to be you.
