What is Insurable Interest in Life Insurance?

Individuals may consider buying a life insurance policy to secure their family’s finances in their absence. Individuals can also buy the policy on the lives of other individuals.

When you buy a life insurance policy, you can get coverage for another individual too. For instance, you can buy the policy for your spouse or children. However, when seeking coverage for anyone other than yourself, you have to establish an insurable interest in the insured individual’s life. Only if the insurable interest is established, you can buy the coverage for another.

But what is the concept of insurable interest and how does it work?

Let’s understand.

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 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

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

1. 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.

2. 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.

3. 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.

4. 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.

References

1. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (Pages 88 to 90)

2. https://www.forbes.com/advisor/life-insurance/what-is-an-insurable-interest/

3. https://www.legalserviceindia.com/legal/article-939-insurable-interest-on-life-insurance-and-non-life-insurance.html

4. https://www.legalservicesindia.com/article/1924/Insurable-Interest-in-insurance-contract.html#:~:text=There%20are%20basically%20two%20types,)%20Contractual%20(2)%20Statutory

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