Here at IBUSA, we’ll often get a call from a client asking is if they can purchase a life insurance policy on someone else, such as their:
- Mother or father,
- Brother or sister,
- Boyfriend or girlfriend,
And each time we get this call we have to discover if this potential client will have an “insurable interest” at the death of the insured?
So, this brings us to the question…
“What is Insurable Interest?”
Insurable Interest Defined:
For life insurance purposes, an insurable interest would be determined by the beneficiary benefiting financially from the insured’s continued existence and would suffer from financial loss or hardship if the insured died.
Essentially, an insurable interest exists if it can be shown that the death of the insured would create a financial hardship or loss to the beneficiary.
So… Let’s take a look at a few common examples
Insurable Interest Examples
Loss of a partner:
In our first example, we have one partner that goes to work whilst the other stays at home looking after the children. If the worker was to pass away, the stay-at-home parent would suffer a huge financial loss and their circumstances would change dramatically.
We can also flip this example and have the stay at home partner pass away in which the working partner would now need to pay someone to do the things that the “non-working” partner did for him or her.
Now in these examples…
Notice we used the term “partner” rather than spouse or girlfriend/boyfriend. We did this on purpose because one’s “title” is not automatically going to define an insurable interest, it’s what this person does that creates the “insurable interest”.
Loss of a sibling:
One sibling is looking to purchase a life insurance policy on another sibling.
In this situation, it may not be immediately obvious where the financial loss would occur however after a few questions it becomes obvious that if one sibling where to die, the other sibling would be responsible for:
- Their burial.
- Or for taking care of their children.
In both cases, an insurable interest can be justified, the amount of that insurable interest however may vary depending on the situation.
Loss of an Ex.:
Now a days with the divorce rate in the United States right around 50% it’s not all that uncommon to see individuals purchasing life insurance policies to ensure any and all future alimony payments and/or child support payments.
So, not only do many ex-spouses have an insurable interested on their ex’s, these “types” of life insurance policies are very common and should be written by an agent who is an expert in these types of life insurance policies so that the spouse who would suffer from the loss of an ex can be sure that their policy:
- Names them as the owner of the policy.
- And ensures them that they will be notified if the policy ever goes into a grace period for non-payment!
When Insurable Interest matters.
As one goes through life, one’s insurable interests may change. Which is why, it’s only important that an insurable interest is present when a life insurance policy is first set up.
Whenever any type of insurance is placed, insurable interest plays a huge role.
Even with homeowners insurance, there would be no point insuring someone else’s home and the application wouldn’t even make it past the initial phase.
With life insurance, the insurable interest assessment comes into play at the time of the application so there isn’t any way to buy insurance in advance of something that may or may not happen.
For example, you couldn’t say ‘well, there will be insurable interest in the future’. In every single state, the insurable interest should already exist at the point of underwriting the policy.
If there is no insurable interest and the policy is issued, it will be considered null and void from the very first moment.
Having no insurable interest has the potential to encourage murder for profit because the insured is more profitable to the beneficiary dead than alive.
At this point, we should note that you can purchase a policy for yourself because we all have an insurable interest in our own lives.
Who typically has an Insurable Interest in a life insurance policy?
So far, we have skirted around the finer details but now it is time to look at exactly who will have an insurable interest;
- If an estate relies upon the survival of one person
- If support or education is provided by one person
- If someone is paying another money for property, services, etc
Normally, the life insurance companies will consider three different categories; creditors, business relationships, and then blood or marriage.
For the latter, this will be immediate family members and partners such as children (including adopted children), siblings, parents, and grandparents; in some states, engaged couples are also protected.
And for the more distant familial relationships – such as nieces and nephews, uncles and aunts, cousins, and stepchildren – they do not fall into the category of insurable interest, and would need to be able to “justify” their need for insurance to an underwriter prior to being able to purchase a policy.
For business relationships, this would be anyone who is dependent on the insured surviving. If a business entity benefits from the continued existence of one person, there is an insurable interest.
Finally, creditors have been known to take policies for their debtors but it can only happen with the consent of the debtor themselves; of course, the coverage cannot exceed the debt amount. With this policy in place, it ensures that the creditor still receives their money even if the insured dies.
Obtaining Life Insurance
Whenever you’re trying to obtain life insurance for those with an insurable interest, it is important that you don’t concede and end up choosing a policy that doesn’t suit your scenario.
Every year, people rush into making life insurance decisions and it means they end up with the wrong policy.
Instead, you should take your time and understand everything involved.
If you need help or have no idea where to start, we recommend talking to a professional as they will ensure your loved ones, business, or creditors can continue as per normal even after you pass away.
Financially, the beneficiary should be able to continue as normal and this is one of the major benefits of life insurance.
With this being such a huge decision, there is nothing wrong with taking your time and searching the market!
The good news…
Is that here at InsuranceBrokersUSA, we have a ton of experience helping folks find a life a life insurance policy that not only protects their family, but also fits well within their budget. So, what are you waiting for? Give us a call today and see what we can do for you