Definition and Examples of Insurable Interest
How does insurable interest work?
Common Requirements
One-Time Approval for Life Insurance
Definition and Examples of Insurable Interest
Insurance companies use insurable interest to determine whether you or someone else should be allowed to obtain an insurance policy. For example, the policy can be for a car, a house, or the life of a person. If a person without insurable interest is granted an insurance policy for something they do not own or for someone they do not care about, they could financially benefit from the destruction of that thing or person.
Common Examples of Insurable Interest
There are several situations where you may have an insurable interest in something or someone in your life. These interests include:
- Property: If you own a car, house, boat, jewelry, or any other piece of property in which you have a financial interest, you have an insurable interest in that property. In other words, if it is damaged or destroyed, you will incur a loss – and insurance can help offset or eliminate that loss by compensating you for repairs or replacement costs. A property and casualty insurance policy, such as a homeowner’s insurance policy, can be used in this situation to provide necessary financial protection.
- Family Members: If you are married, for example, and rely on your spouse’s income to meet your needs, you have an insurable interest in your spouse. Life insurance can be used to compensate for the financial loss that may occur if your spouse were to pass away prematurely. Of course, the same applies to you: life insurance can compensate your spouse if you die prematurely. Most life insurance companies will issue policies for any family member who has a financial interest in another person, such as parents, siblings, children, a spouse, adult disabled children, and grandchildren.
- Employees: If your company’s operations or profitability heavily rely on one employee or a group of employees, insurance can mitigate the loss if something happens to them. Your company may decide to purchase life and/or disability insurance policies for key employees. This allows your company to meet its financial obligations until the insured person(s) can be replaced. A large company may issue a significant insurance policy for its CEO and members of the board of directors for this reason.
- Yourself: You have an unlimited insurable interest in yourself, allowing you to obtain a life insurance policy on yourself and name anyone you choose as a beneficiary. For example, if you wish to leave an inheritance for your children, you can obtain a life insurance policy to achieve that goal.
How Does Insurable Interest Work?
Insurable interest in this sense has nothing to do with earning interest as you might with a bank account or a fixed-income security. Consider whether you would suffer a financial loss if you were to lose a person or something in your life or if you would lose money from damage to a piece of property. If you would lose money, you may have an insurable interest in the continued existence of that person, place, or thing. This interest can be protected by a life and/or disability insurance policy, or a property insurance policy.
Common Requirements
All life insurance companies require the potential owner to prove insurable interest before issuing an insurance policy.
Insurable interest is required in insurance contracts because it prevents people from profiting from the loss of something they have no connection to. For example, you cannot buy an insurance policy on your neighbor’s car if you notice they are a bad or reckless driver. You also cannot obtain a life insurance policy on a stranger.
Approval
Once for Life Insurance
Insurable interest only needs to exist when a life insurance policy is first issued. It does not need to continue once the policy is in effect. For example, a husband who insures his wife and names himself as the beneficiary can establish insurable interest at the time of application. But if they divorce and he remains the beneficiary, he will receive the death benefit if his wife passes away (and the policy has not lapsed).
In contrast, for property insurance policies, such as auto insurance, there must be insurable interest at the time of purchasing the policy and at the time of any loss.
Source: https://www.thebalancemoney.com/what-is-insurable-interest-5183804
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