I get a lot of questions and calls from people interested in buying insurance on the lives of other people. Some are shocked when I tell them they can’t buy the coverage they want because they have no insurable interest.
What Is Insurable Interest And Why Does It Matter?
If you would suffer an economic loss should someone else die, you have an insurable interest and you can buy the appropriate amount of insurance on their life. If you would not suffer a financial loss when another person passes, you do not have an insurable interest. In that case, you can’t buy life insurance on that person. It’s that simple.
Insurance companies won’t sell you coverage unless you have insurable interest and they are kind of adamant about this. It stops unscrupulous people from buying policies on others and then pushing them under a bus. That’s exactly what happened in Los Angeles several years ago.
Two women housed and cared for homeless men for a couple of years….and then ran them over to collect on insurance policies they purchased. Nasty business.
The question then becomes, who do you have an insurable interest in?
You can buy insurance on your own life and name any beneficiary you like. There is a presumption that you value your life more than money. Therefore you have an insurable interest. If that isn’t true, we need to talk….
2. People Who You Depend On
If you rely on someone else for financial support or for other assistance, you have an insurable interest.
Let’s say you get divorced and are awarded alimony of $3,000 a month. If your ex-spouse dies, the checks would stop coming….right? That would impact you financially so you have an insurable interest in your former spouse and you can buy insurance on their life.
Keep in mind that you still have an insurable interest even if you don’t rely on the other person for financial support. Let’s say you have a stay-at-home spouse. If he or she were to pass away, you’d have to pay to have another person come in and run the household because you have to continue working. Because your spouse’s death involves a financial loss, you can life insurance on your non-working spouse.
3. Beneficiaries You Need To Protect
The best way to explain this is by way of example. Let’s say you would have to support your daughter and her family if her husband dies. That being the case you have an insurable interest in your son-in-law and you can buy insurance on him.
You can see that the concept of insurable interest is very broad. It allows you to buy insurance on quite a few people.
This extends beyond loved-ones too. You can buy coverage on your boss, your key employees and people who owe you money. Does that make sense?
What Happens If The Situation Changes?
If you had an insurable interest when you bought the policy, you can maintain the policy even if the situation shifts.
Let’s say you divorced your husband 10 years ago and bought a policy to safeguard your alimony. Now, 1o years later, you remarry and the alimony dries up. Do you have to cancel the life insurance? Nope. You can if you want of course but you aren’t required to do so. That’s because you had an insurable reason to buy the coverage at the time you bought it.
The concept of insurable interest is the key to your understanding of who you can buy insurance for and how much coverage you can purchase.
I like this because it takes away the incentive for rotten people to do nasty things and it also helps reduce the amount of coverage people buy they really don’t need.
Does this concept of insurable interest make sense to you? Should the insurance companies allow you to buy insurance on anyone you like? Why?