Anyone can buy life insurance if they qualify, but not everyone qualifies and not for reasons, you may think. While life insurance applications determine your likelihood of dying relatively soon to determine a life insurance company’s risk, you must also prove there is an insurable interest – it’s the law.
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What is Insurable Interest?
Insurable interest means you have a financial dependency on the person. For example, if you buy life insurance for your spouse, you can prove financial dependency since you live together, possibly have children together, and own many assets together.
Now, if you tried to buy life insurance for your best friend, it would be a lot harder to prove you have financial dependence on your friend. If your friend died, would you be able to prove you would financially suffer?
This is the definition of insurable interest.
When Must Insurable Interest Exist?
You must prove insurable interest when you buy life insurance on someone else. If you purchase life insurance on yourself, you don’t have to prove insurable interest. You always have an insurable interest in your own life.
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If you buy life insurance on yourself, you are the owner and the insured – there’s no insurable interest to worry about. You can also name whoever you want as your beneficiaries without proving a financial dependency.
Insurance companies assume that whoever you name as your beneficiary is the people you want to ensure live a financially peaceful life even after your passing.
What Does the Law Say about Insurable Interest?
The law states that insurable interest must be present both when buying the life insurance policy and at the time of loss. For example, you can’t buy a life insurance policy on a person and then not be in their lives or financially dependent on them when they pass away and expect a payout.
Why is Insurable Interest Important?
Insurable interest is important because otherwise, anyone could take out life insurance on anyone. Insurance companies would be run into the ground because they would have to pay out on policies to people who don’t have any financial dependence on the deceased.
How to Prove Insurable Interest?
Proving insurable interest means proving you have a financial dependency on the person you own life insurance on (the insured).
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Life insurance companies will ask for proof at the time of application and before a payout. No proof is required if you’re insuring direct family members such as a spouse or children.
However, if you’re insuring someone outside of your direct family, proof may be required. Sometimes you may even need to prove insurable interest in a sibling or aging parents.
For example, a sibling with special needs may rely on you financially. You can verify this situation quite easily.
If you’re insuring your parents, you may have to prove how you rely on them financially as an adult or if your parents insure you, they may have to prove how/why they depend on you for financial support.
You may also insure a business partner, but you must prove that you rely financially on one another, and the death of one partner would affect the business and its future. You may even take out life insurance on a key player in your business, someone who, if they died, would cause your business a loss of profits, as long as you can prove it.
How to Get Around Insurable Interest
If you want to insure someone in your life who doesn’t have an insurable interest or at least acceptable insurable interest in the eyes of the insurance company, you can insure yourself. You never have to prove insurable interest for yourself.
To ensure that the people in your life get the money needed, you can name them as beneficiaries. This doesn’t work insuring them, though, unless they buy insurance on themselves and name you as the beneficiary.
FAQ – Insurable Interest
Can I buy life insurance on my parents without them knowing?
You cannot buy life insurance on anyone without them knowing. Even if they know, they must also consent to the insurance. This is the case even if they aren’t paying for it. The person taking out the policy is the owner and is responsible for payments, but the insured must confirm you have an insurable interest in them to take out the policy.
Can I buy life insurance on an ex-spouse or my child’s parent?
As long as you can prove insurable interest on the other party, you can take out life insurance with their consent. This means you can buy life insurance on your child’s parent if you co-parent and their passing would cause you financial distress.
The same is true of an ex-spouse. Just because you get divorced doesn’t mean your life insurance policy becomes null and void. It’s up to the owner to change the beneficiaries. Still, if you see a financial dependence in your ex-spouse, especially if you have children together, you can leave him/her as the beneficiary.
Insurable interest may seem complicated or like another roadblock in your journey to get life insurance, but it’s to protect everyone involved.
Without insurable interest, anyone could take a policy out on anyone, and it would be a free-for-all. Ensuring financial dependence saves you money – you can only take out policies on people that would affect you financially if they died. It keeps insurance companies in the business of writing policies.