If you are considering purchasing a life insurance policy, you may have run across the term known as “insurance interest”. This is a very important aspect of the policy because, in order for it to be valid, the beneficiary must meet the standards of the insurable interest in life insurance.
Did You Try Out Our Life Insurance Quote Comparison Tool? Save BIG!
Understanding what it all means starts when you define insurable interests that you understand just how it affects your decision to choose a beneficiary. The life insurance insurable interest is really about the relationship of the beneficiary to the policyholder.
Table of Content
What is an Insurable Interest in Life Insurance?
The insurable interest definition is a simple one. This is the interest of the beneficiary of the policy to prove the need for being the one receiving the proceeds. This is also called the insurable interest doctrine and the interest is based upon the impact that the policyholder has in the life of the beneficiary. Thus, the loss of the person would have a substantial impact on the beneficiary in regards to their relationship.
In many cases, the spouse is most often cited as the beneficiary as they can use the money to pay for funeral expenses, wipe out existing debt and offer a nest egg to ensure that the spouse and their family will get through these troubling times at least financially.
Basically, there must be an “insurable interest” on the part of the beneficiary in order for the life insurance policy to have validity. There are legal guidelines that exist in all states to ensure the type of people who become beneficiaries have bonds of family or love that tie them to the policyholder. However, there are also financial bonds that may also hold the beneficiary to the policyholder as well.
Principles of Insurable Interest:
You may also hear about the principles of insurable interest as well. This occurs when there are strong financial ties between the beneficiary and policyholder that have nothing to do with family or the emotional ties that are involved.
An insurable interest beneficiary can be a company for example in regards to the CEO or president whose very life hold great financial interest. This principle of insurable interest means that if the CEO should pass away unexpectedly, the financial loss to his or her company would be considerable. So, it is actually quite common for a person in this standing to be insured in this manner.
Of course, this will often include a financial assessment of your company and your place in it so that the standing of the policy has merit. A president who is no longer active in the company or serves a purpose that would not cause any material financial loss may find that such an insurance policy is no longer viable.
If there are changes in the status of a company owner, CEO or president that in turn creates a different relationship with the company, such matters will need to be fully discussed in order to know whether the life insurance policy still has merit in this particular case.
Some Examples of Life Insurance Insurable Interest:
There are several examples of insurable interest in life insurance. Understanding which ones apply to you and your beneficiary is crucial for the policy to be legal.
Example #1: The policyholder is the son of the beneficiary, his mother who lives in another country and has not talked to her son for years.
This is an example of a viable insurable interest because the beneficiary and policyholder is part of a mother/son relationship. Regardless of the current situation between the two people, parents, children, and spouses are considered to have an insurable interest on each other. This also applies to grandparents as well.
Example #2: The CEO of a large company has listed the business partners as the beneficiaries of her life insurance policy.
Despite the fact that there is no blood or emotional relation, there is a very strong financial one as the company would suffer from considerable financial losses if the CEO should pass away unexpectedly.
Example #3: The policyholder awards his first cousin as the beneficiary since he has supported him for the past several years.
Normally, cousins, nieces, nephews, aunts, uncles and even step-children or step-parents do not qualify in being the beneficiary because the relationship is not considered close enough. However, because of the financial relationship, the first cousin is allowed to be a beneficiary.
Example #4: The policyholder owes a substantial debt to a person he or she borrowed money from and has yet to pay it back.
The creditor/debtor relationship is a viable one when it comes to being the principle of insurable interest. This means that as long as this relationship exists, they can be the beneficiary of the policy itself.
The emotional and financial interests are considered when it comes to naming a beneficiary. Although, parents, grandparents, children, and spouses automatically qualify and do not require the further establishment of the bond in order to become the beneficiary.
Insurable Interest Life Insurance Beneficiary:
Understanding the meaning of the insurable interest beneficiary means that as the policyholder, you can make the best choice possible for who should receive the funds as accrued by your life insurance. This is a very important decision that needs to be fully vetted in order to ensure that no legal processes can interfere with the money going to where it needs to be.
For the aforementioned blood relations as well as your spouse, such discussions should be minimal as they are recognized in all states as qualifying as beneficiaries. However, if you should want to select someone from outside that particular group, then you will need to go over those concerns with the appropriate insurance agent.
By discussing the life insurance insurable interest with the agent from the company that offers the policy, you can go over all the rules and regulations so that your interests are fully represented in case you should pass away unexpectedly.