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Who You Can And Can Not Buy Life Insurance For

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

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?

1. Yourself

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?

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Comments

  1. Kim says

    December 3, 2017 at 2:19 PM

    If I purchase term life insurance on my child’s father say for $100,000 because of child support obligations and father passes away in a year and I am the beneficiary would I receive the $100,000 and if so is it in a lump sum? Are there restrictions on the cause of death, suicide and natural causes.

    Reply
    • Neal Frankle, CFP ® says

      December 4, 2017 at 2:22 AM

      You would have to check the conditions of the policy. Usually suicide is precluded in the first two years and usually the benefit is paid in a lump sum.

      Thanks,
      Neal

      Reply
  2. Slimm says

    October 8, 2017 at 12:15 PM

    Statistically the homeless or drug addictive are more likely to pass early on there own. Would I be able to buy life insurance on someone if say I lend them 500$ and then insure them for 200k. They will never pay me back of course but should meet the requirement for insurable interest. If you found enough at risk people certainly you would recover your investment without purposely hurting anyone. Just a question I don’t have the money or want to do such a thing anyway.

    Reply
    • Neal Frankle, CFP ® says

      October 8, 2017 at 12:31 PM

      I don’t believe you have an insurable interest since your financial risk is only $500. Thanks, Neal

      Reply

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Who is Neal Frankle

Neal Frankle

I'm a CERTIFIED FINANCIAL PLANNER™ Professional with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement.  We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement. We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

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Retirement Crusaders

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Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement.  We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

Retirement financial education for people age 55+ seeking to retire well and for those retired seeking to enjoy a better retirement. We discuss retirement planning, retirement investments, taxes in retirement, retirement spending, IRA and 401k distributions and we will personally answer questions that you pose in the video comments.

While so much financial information is about preparing for retirement, what about managing your finances in your retirement years? That's exactly what we cover at Retirement Crusaders.

Neal Frankle is a retired registered investment adviser. Larry Klein is a retired financial advisor and retired CPA. They have 70 years of financial advising experience to share so that you have your best retirement years.

YouTube Video UCoU0buhwVplzXrsyf342nOg

Retirement Crusaders

June 10, 2022 12:19 PM

Subscribe
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