When Must Insurable Interest Exist in Life Insurance Policies

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Posted Jan 3, 2025

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Having insurable interest in a life insurance policy is a crucial aspect to consider. Insurable interest must exist in life insurance policies for the policy to be valid.

In most states, a person has insurable interest in the life of someone they have a financial relationship with. This can include spouses, children, parents, and business partners.

For example, a business partner may have insurable interest in the life of their business partner, as the loss of their partner would result in a financial loss for the business.

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Definition

To understand what insurable interest is, let's break it down: it's the financial or economic stake that a person or entity has in the insured object or person.

This stake means that the policyholder would suffer a financial loss if a covered event occurs.

In other words, insurable interest is about having a direct connection to the thing being insured, so that a loss would actually hurt the policyholder.

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Types of Insurable Interest

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You can have an insurable interest in your own health or the health of your dependents in health insurance. This means you'd suffer a financial loss due to medical expenses or emotional loss if the insured person becomes ill or injured.

In health insurance, the policyholder generally has an insurable interest in the health of their dependents.

Health insurance typically covers regular medical expenses and also provides life cover up to 70 years.

Property

Property insurance requires the policyholder to have an insurable interest in the property, meaning they'd suffer a financial loss if it were damaged or destroyed.

A homeowner has an insurable interest in their home, and a car owner has an insurable interest in their car.

Health

Health insurance policies are designed to protect individuals from financial loss due to medical expenses. This type of policy is usually taken out by someone who has an insurable interest in their own health or the health of their dependents.

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An insurable interest in health insurance means that the policyholder would suffer a financial loss if the insured person becomes ill or injured. This is often the case for family members who rely on each other for financial support.

In health insurance, the policyholder typically has an insurable interest in their own health or the health of their dependents. Regular premiums are usually paid to maintain the policy, and the coverage can extend up to 70 years of age.

Life cover is often included in health insurance policies, providing a safety net for the policyholder's dependents in the event of their passing.

Stranger-Originated Life Insurance

Stranger-Originated Life Insurance (STOLI) arrangements often target seniors, where investors persuade them to take out new life insurance policies with the investors named as beneficiary.

Investors loan money to the insured to pay the premiums and the insured ultimately assigns ownership of the policy to the investors.

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The investors are the constructive applicants, owners, and beneficiaries of the policies, which is a key red flag in many states.

Many states view STOLI arrangements as fraudulent because the investors have no insurable interest in the insureds.

This means that the investors are not eligible to receive the death benefit, as they don't have a legitimate reason for wanting the insured to live or die.

How to Prove

Proving insurable interest can be a straightforward process, but it's essential to understand what's required. Family members like spouses or children typically don't raise any red flags.

However, in cases where business partners or creditors are involved, the insurance company may want to take a closer look at the relationship. This could involve an interview with the parties involved and requests for identification.

If you're unsure what documents you'll need to prove insurable interest, it's best to ask your life insurance agent or company. They can guide you through the process and let you know what's required.

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In some cases, the insurance company may deny your application if you can't prove insurable interest. To avoid this, it's crucial to be prepared and have the necessary documentation ready.

Here are some potential steps to take when proving insurable interest:

Ask your insurance agent or company what documents you'll need to provide.Be prepared for an interview with the insurance company to discuss your relationship with the insured.Have identification and other relevant documents ready to submit.

History and Different Types

The concept of insurable interest has a rich history that dates back to the 18th century.

The United Kingdom was a leader in establishing insurable interest, passing legislation such as the Marine Insurance Act 1745 and the Life Assurance Act 1774, which prohibited insurance contracts without insurable interest.

In 1806, Lord Eldon LC in the English House of Lords case of Lucena v Craufurd defined insurable interest as "a right in property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party."

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Different Types

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Life insurance policies require the policyholder to have an insurable interest in the life of the insured person, meaning they'd suffer a financial or emotional loss if the insured person dies. A person or organization can obtain an insurance policy on the life of another person if they value the life of the insured more than the amount of the policy.

A company may have an insurable interest in a President/CEO or other employee with special knowledge and skills. A creditor has an insurable interest in the life of a debtor, up to the amount of the loan.

Insurable interest is assumed to exist for close relatives, such as spouses and minor children, who are presumed to have a financial and emotional stake in the other person's life. This is why a spouse may have an insurable interest in the life of their partner, and a parent in the life of their child.

A person is also presumed to have an insurable interest in their own life, which is why life insurance policies often don't require a separate insurable interest clause.

History

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The concept of insurable interest has a long history, dating back to the 18th century in the United Kingdom. The Marine Insurance Act 1745 introduced the concept, although it didn't use the term explicitly.

This legislation was a significant step towards distancing the insurance business from gambling, which helped to enhance the industry's reputation. The Life Assurance Act 1774 made life insurance contracts illegal if no insurable interest could be proven.

Lord Eldon's definition of insurable interest in 1806 remains widely referenced, although modern commentators consider it unsatisfactory. He defined it as "a right in property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party."

The Marine Insurance Act 1906 further clarified the concept, rendering contracts void if no insurable interest existed. This legislation helped to solidify the understanding of insurable interest in the insurance industry.

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Frequently Asked Questions

When must an insurable interest legally exist in property?

An insurable interest in property must exist at the time the insurance takes effect and when the loss occurs. This interest can lapse in between, but must be present at these two key moments.

Ann Lueilwitz

Ann Lueilwitz

Senior Assigning Editor

Ann Lueilwitz is a seasoned Assigning Editor with a proven track record of delivering high-quality content to various publications. With a keen eye for detail and a passion for storytelling, Ann has honed her skills in assigning and editing articles that captivate and inform readers. Ann's expertise spans a range of categories, including Financial Market Analysis, where she has developed a deep understanding of global economic trends and their impact on markets.

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