What is Insurable Interest in Life Insurance?

Reviewed by licensed agent

Updated Aug 2, 2024

In life insurance, you have an "insurable interest" in another person when the death of that person would cause you a financial loss or other hardship.

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Insurable interest can be present in many situations, such as marriage. But it is used by the insurance company when you apply for any life insurance policy on someone not directly related and before the company pays the death benefit.

Proof of insurable interest, along with consent from the insured person, is required to purchase a life insurance policy on another person.

What is insurable interest?
What is insurable interest in life insurance?
How to prove insurable interest
When must insurable interest exist in a life insurance policy?

What is insurable interest?

You have an insurable interest in something if you would suffer some kind of loss if that person or property were lost or damaged. For this reason, it would make sense for you to buy insurance on the person or property, so you can continue to receive those benefits.

What is insurable interest in life insurance?

You can't take a life insurance policy out on just anyone. In order to buy a policy, insurable interest must exist. In the case of a life insurance policy, the owner of the policy must always have an insurable interest in the life of the insured person. If the owner is not the beneficiary, then the beneficiary named in the contract would also need an insurable interest.

Insurable interest means a person receives a financial or other type of benefit from the continued existence of the person insured. So, if the insured person were to die, the surviving person would experience a financial loss or other hardship.

For example, say you wanted to buy a life insurance policy on person A (Bob) and name person B (Sam) as the beneficiary. Both you and Sam would need to have an insurable interest in the life of Bob to purchase the policy.

How to prove insurable interest

Proof of insurable interest is required when applying for and buying a life insurance policy. Life insurance is a tool to make you whole again financially after the loss of someone. In theory, some people would be tempted to take out a life insurance policy on a random person to receive money if that person were to die. This is why the principle of insurable interest was created: to ensure that life insurance is used properly.

Insurable interest is nonnegotiable for life insurance policies. Without an insurable interest, the policy can be voided or denied. It is the duty of the policy owner to prove they have an insurable interest in the insured person. They must provide proof when applying and when the insured person dies.

To confirm an insurable interest, a life insurance company will usually talk to the policy owner, beneficiary and insured person. They will investigate the relationship to decide if there is an insurable interest. If an insurable interest is not found, the policy application would be denied or the death benefit would not be paid.

When must insurable interest exist in a life insurance policy?

You're considered to have an insurable interest in your own life, so you can always purchase life insurance on yourself. In this case, you would be both the policyholder and the insured person. The beneficiaries of the policy wouldn't need to prove an insurable interest in you either, because it's presumed that you would name beneficiaries who want you to live a long and healthy life.

Insurable interest also extends to your direct dependents and relationships by blood and marriage. This can include:

Husbands and wives
Children (including adopted)
Grandparents and grandchildren
Brothers and sisters

All of the examples above are direct relationships where insurable interest is always present. Insurable interest can also exist in business and between creditors and debtors.

Business relationships create an insurable interest if you financially depend on the insured person.

For example, say you start a business and hire Alex to run it. In this case, you would have an insurable interest in Alex's life, because if he were to die, you would experience a loss of business profits. This is known as business life insurance and is common.

Often, corporations take out key man life insurance on their officers. And business partners purchase life insurance policies on each other.

Creditors and credit companies are allowed to take out life insurance policies on their debtors. In this case, with consent from the debtor, the company could take out a life insurance policy for the amount owed.

When does insurable interest not exist?

Insurable interest is generally present in blood relationships but would not exist in the following scenarios, unless there is proof of financial dependence:

Aunts and uncles
Cousins
Nieces and nephews
Stepchildren and stepparents

Say, for example, you have a neighbor who is 90 years old. You consider taking out a life insurance policy on her, because she doesn't have many more years to live. You would not have an insurable interest in this situation, because you would not suffer a financial loss from your neighbor's death.

Can I buy life insurance on my parents without their consent?

You may decide to buy life insurance for an aging parent, to pay for the many costs if that parent were to die. It is possible to purchase life insurance, but that parent must sign off on it in writing.

For example, funeral services cost an average of $8,000. If you do not have this much money in savings, you could use life insurance to fund an expensive but necessary cost like this.

Can I buy life insurance on my child's mother or father?

As long as you can prove that you have an insurable interest in the other person, as you might with an ex-spouse or co-parent, then you can take out a life insurance policy on them. You'd need to demonstrate that the loss of that person would be a financial hardship for you or your child.

For instance, if your child's father, whom you've divorced, died, you might lose future child-support or alimony payments. This could count as an insurable interest. So you could buy a life insurance policy on your ex-husband and name yourself as the beneficiary.

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