Insurable Interest in Life Insurance

What is insurable interest?

Insurable interest in insurance, in simple terms, means that you should have a financial interest in the life of the insured individual¹. The financial interest should be such that you would make a financial loss in case the insured individual passes away prematurely.

However, in life insurance policies involving family members, insurable interest is not judged only by using financial metrics. In such cases, the emotional value in the life of the individual is also assessed.

 

How does Insurable Interest work?

If you buy a life insurance policy on the life of an individual, you have to establish the existence of insurable interest when you buy the policy¹. After the policy is bought, the requirement of continued insurable interest is not required during the policy tenure.

For instance, you can buy a life insurance policy on the life of your spouse when you are married. However, if you get divorced during the policy tenure, the coverage would not be affected. In the case of a claim, the insurance company would not ask you to establish an insurable interest in the life of your spouse.

 

Who is eligible to have an Insurable Interest in Life Insurance?

In a life insurance policy, insurable interest is said to exist primarily in the following cases¹ –

An individual has an unlimited insurable interest in his/her own life,

An individual has an insurable interest in the life of his/her spouse,

An individual has an insurable interest in the life of his/her children.

Furthermore, other relations wherein insurable interest exists include the following² and ³ –

Debtors have an insurable interest in the lives of their creditors up to the amount of debt owed

Employers have an insurance interest in the lives of their employees

3. Partners have an insurable interest in each other’s lives up to the amount of capital contributed by them

 

Examples of Insurable Interest

Here are some common examples of insurable interest in life insurance –

Spouses have insurable interest in the lives of each other. As such, husbands can buy a life insurance policy for their wives and vice versa.

Parents can buy life insurance plans on the lives of their children.

In the case of partnership firms, if your business partner’s death would cause you financial loss, you have insurable interest in their life..

 

Is Insurable Interest Required for Insurance Policies?

Insurable interest is a defining principle of insurance contracts. In life insurance plans, if you are buying a policy on the life of another individual, you must have to establish an insurable interest in the life assured’s life to the insured .

 

Key Takeaways

Insurable interest is a key principle of insurance policies which states that you should have a financial interest in the life of the insured individual.

When buying a life insurance policy for another individual, you would have to establish an insurable interest in the insured’s life.

Common examples of insurable interest include unlimited insurable interest on your own life, insurable interest between spouses, insurable interest that parents have on their children, etc.

 

Conclusion

Insurable interest is one of the important principles of a life insurance policy. It should be established when you buy the policy on another individual’s life. Check on whose life you have an insurable interest so that you can buy the policy for your loved ones.

 

FAQs

 

What is considered an insurable interest in life insurance?

You should have a clear financial interest or emotional interest in the life of another individual to establish an insurable interest in life insurance plans.

 

Where is Insurable Interest not applicable?

Insurable interest is not applicable in cases where individuals do not have a financial interest in the life of another individual. For instance, you don’t have any financial interest in your neighbor’s life. If the neighbor passes away, you don’t suffer a financial loss. As such, you cannot buy a policy on your neighbor’s life.

 

What are the types of insurable interest in insurance?

There are no types of insurable interest in life insurance. However, in general, in insurance plans, insurable interest can be of two types – contractual and statutory⁴.

 

What is the principle of insurable interest?

Someone having an insurable interest in you means that they would experience financial loss and hardship should you die. Without an insurable interest, a person cannot purchase a life insurance policy on another person.

 

How do insurers verify insurable interest?

Insurers check your relationship with the life assured to verify and evaluate insurable interest among other factors.

 

At what stage of policy life cycle should the Insurable Interest Exist in Life Insurance?

In life insurance plans, insurable interest must exist at the time of buying the policy.

 

Source

1. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (Page 90)