What is Insurable Interest?
Insurance interest is the benefit someone gets from a certain person or item continuing in its current state. In order for someone to get insurance on something or someone, they need to have an insurable interest in that object or individual.
Insurable interest in life insurance
In life insurance, insurable interest basically means that someone’s financial future is tied to the person on whom they’re buying life insurance.
Many people buy life insurance on themselves. They don’t need to do anything to prove insurable interest because the life insurance company knows they have a vested interest in themselves.
But some people buy life insurance on other individuals. In those cases, they need to be able to prove that they have an insurable interest in the person whose life they want to insure. Basically, they need to be able to prove that they would suffer financial hardship because that person passed away.
Examples of insurable interest
There are two common instances in which people can easily prove insurable interest: family members and business partners.
A stay-at-home spouse might buy life insurance on their bread-winning partner, for example. In that situation, they would struggle to pay the rent/mortgage, buy groceries, and make other financial ends meet should their spouse die. Because they’re reliant on their spouse’s salary, they have an insurable interest in them.
Similarly, if someone co-owns a business with another person, their business could financially suffer when that person passes away. Because they have an insurable interest in their business partner, they can buy life insurance on them. Then, should their business partner die unexpectedly, they can collect the policy benefit in order to keep the business afloat.