Buying life insurance can be confusing. From having to figure out what type of life insurance you need to sorting through the confusing jargon, you may feel like you need a glossary. So, let’s break down one of those legalese terms you may have seen before: insurable interest.
What is insurable interest in life insurance?
“Insurable interest” means, in simple terms, that someone would experience financial hardship upon your death. This is a basic requirement for a life insurance contract: The person who is purchasing the policy needs to have an insurable interest in the insured person.
Example of insurable interest beneficiary
For example, if you and your spouse live in a two-income household supporting three children, then your spouse would clearly have an insurable interest in your death since it would create a financial hardship to go from two incomes to one income. That’s why life insurance companies generally allow spouses to purchase insurance policies on their partners’ lives.
One of the main reasons that insurance companies use insurable interest in life insurance is to prevent insurance fraud. Insurance companies are in the business of protecting against losses, so you need to show that an actual economic loss would happen before insuring someone. Insurers don’t allow you to take out a life insurance policy in the name of a stranger since their death doesn’t have any financial impact on you. For example, you can’t take out a life insurance policy on a random famous person and expect to collect the payout when they die. By going through the process of understanding your insurable interest, that’s exactly what the insurance company is hoping to prevent.
When must insurable interest exist in a life insurance policy?
Life insurance policies always have an insurable interest requirement. In order to buy a policy on your life, the policy owner must show life insurance insurable interest. (Below, we’ve included insurable interest examples of the people who can typically claim insurable interest.)
Close family generally qualifies automatically, but this rule comes into play more often if someone who is outside of your family would like to take a life insurance policy in your name because they rely on you financially, such as a business partner. Of course, you only need to prove insurable interest at the time of your life insurance purchase. For example, if you just got married, you currently have an insurable interest in your spouse and can take out a policy on them.
Insurable interest examples
Your spouse or partner: This is the most common example of someone you would be considered to have an insurable interest in. Sometimes, you may also need to name an ex-spouse as a beneficiary as part of your divorce settlement.
Your children: You also have an insurable interest in your children, but your child does need to be 18 or older in order for you to purchase a policy on them.
Other relatives: You may need to show additional documentation to insure other relatives, such as a sibling with a disability or an aging parent who relies on you for financial support.
Business partner or employer: You’ll need to show documentation to purchase a policy on a business partner or to allow your business partner to purchase a policy on your life. You can read more about business owners life insurance here.
How to show insurable interest in life insurance
When you purchase a life insurance policy, your insurance agent will help you understand which people in your life may meet the insurable interest requirement, such as your children or spouse. If there’s someone who you are supporting financially outside of your immediate family, you can let your insurance agent know that you want to insure their lives.
Insurable interest requirement
To verify those people, your agent may ask them for official identification, a medical exam, or interview them on the phone to get more information about your relationship. Most importantly, this process will allow you and the people who rely on you to have the peace of mind that they’ll be okay financially if you die.
Insurable interest FAQ
Must an Insurable Interest Always Exist in Life Insurance?
Yes, insurable interest is a basic requirement for a life insurance contract. The person who is purchasing the policy needs to have an insurable interest in the insured person.
Why Can’t I Claim an Insurable Interest Without Someone’s Consent?
If you wanted to take out a policy in the name of a non-family member, you’d have to get their consent and prove that their death has a financial impact on you. This prevents strangers from illegally trying to claim other people’s assets when they die.
Why Does Insurable Interest Exist?
Insurable interest helps insurance companies prevent insurance fraud.
Still have questions about life insurance?
Fidelity Life offers a wide variety of term life insurance and permanent life insurance products to support people at every stage of life. Get your quote online today or call one of our agents at (855) 291-6365.
At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible.
