The term “insurable interest” refers to the benefit (or interest) a person has in an insured object (or person – as in a life insurance insurable interest). This benefit can refer to a financial benefit, among others. A person has insurable interest in a thing when he or she would experience some kind of loss (financial or otherwise) if the thing were to be damaged or lost.
Say that you have piece of jewelry in your home that is also a family heirloom. If someone were to steal it (or if you were to drop it down the sink, or in the toilet, or even lose it in the garbage) you would suffer different kinds of loss, both financial and emotional. Thus, you have an insurable interest in it.
If a friend were to lose her engagement ring in the same way, you would probably feel sorry for her and hope she finds it, but you yourself will not have gone through any kind of financial loss. You have no insurable interest in her ring in this case. You cannot purchase insurance unless you have this kind of interest in the thing you want to insure.
The idea of insurable interest came about in order to avoid fraud or gambling in insurance Early on insurance was a kind of speculative sport, and was the equivalent of people today taking policies on celebrities like Joan Rivers, for example. A person cannot buy a policy on a stranger or someone else’s belongings because the assumption is that the person has something to gain from the loss of those things, not that he or she would suffer their own type of loss from the loss of that person or those objects.
Incorporating insurable interest into the requirements for purchasing policies made the insurance industry more reputable and trusted, and less likely to fall prey to scams and fraud. Now that you know the insurance interest definition let’s take a look at the most common type of insurance where the issue of insurance interest arises: life insurance.
Insurable Interest and Life Insurance
It’s obvious why a person can purchase insurance for their property. The insurable interest discussion on life insurance is perhaps more interesting and compelling.
Of course, it’s assumed that a person has an insurable interest in his or her own life and health, and would far more rather be alive than not. In this case, the person purchasing a policy on his or herself does not usually have to prove insurable interest—neither theirs nor the beneficiary, as it is also assumed that the policy holder believes the beneficiary would also rather the insured be alive.
The basic principal of the insurable interest in life insurance is the understanding that the beneficiary of the policy values the person insured far more than the money from the policy. In this case, it is understood that the beneficiary (who is also the one who has taken out the policy) has suffered a great loss, and this is how the insurance covers that loss.
There are fairly strict rules about what family members can insure other family members based on a perceived idea of insurable interest. Parents can take policies out on their children, and children can likewise purchase policies for their parents. Husbands and wives have total interest in each other, and can purchase policies for each other. These policies can cover different situations such as emotional loss and financial loss. A spouse or child may be financially dependent on the person named in the policy, but this financial dependence is not a requirement to prove insurable interest.
A Company’s Insurable Interest
An interesting take on this is the belief that companies can have insurable interest in their workers—both in higher ups and in those lower down the ladder. There has been some controversy about this recently, where companies took life insurance policies out on their employees without their employees’ consent. In these instances, the companies collected the policies on their deceased employees, who sometimes did not even work for them anymore.
Of course companies have a definite and obvious insurable interest in their CEO’s and other executives who are crucial to the running of the company. In some cases, companies were discovered having taken out policies on lower level employees, and receiving tax breaks for it. Many called this an “investment scheme.” Some family members were able to sue the companies and claim the policy benefits. Now, companies are required by law to get the consent of all employees before purchasing life insurance policies.
The Purpose Behind the Principle of Insurable Interest
Insurable interest is another tool the insurance companies use in an attempt to keep the industry honest. It seems this would be a rather intuitive principal to most people, but the truth is that it has been ignored too many times. If you need to locate a life insurance policy, the insurance rate quote tool on this page can help you get started now!