The Insurable Interest in a Life Insurance Policy

UPDATED: Jul 17, 2023Fact Checked

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Jeffrey Johnson

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Mary Martin

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Mary Martin has been a legal writer and editor for over 20 years, responsible for ensuring that content is straightforward, correct, and helpful for the consumer. In addition, she worked on writing monthly newsletter columns for media, lawyers, and consumers. Ms. Martin also has experience with internal staff and HR operations. Mary was employed for almost 30 years by the nationwide legal publi...

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UPDATED: Jul 17, 2023

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UPDATED: Jul 17, 2023Fact Checked

To stop your good neighbor Sam from taking out a life insurance policy on you and then killing you to get the life insurance money, your neighbor, as the purchaser of the insurance policy, must have an insurable interest in the life of you, the person being insured at the time of application. In dealing with life insurance, a person is deemed to have insurable interest when the purchaser has a reasonable expectation of profit or benefit from the continued life of the insured.

Every state requires that an insurable interest exist at the time of application. Policies issued on lives where there is no insurable interest are regarded as void from the beginning because they are against public policy. They are against public policy because they encourage murder for profit. If there was no insurable interest requirement, some people would be tempted to purchase life insurance policies to collect the death benefit by killing the insured.

A person is always considered to have an unlimited insurable interest in his own life and health. Therefore, the beneficiaries of the policies that an insured purchases on his own life do not need to have an insurable interest. It is presumed that the insured would name as a beneficiary only people who want the insured to live a long and healthy life. A person, therefore, can obtain as much insurance as he wishes on himself – subject to other limits an insurance company might have. For example, insurance companies commonly limit the amount of insurance they will place on a person to that appropriate to his income and life style.

Determination of insurable interest

Courts and state laws have established guidelines for those persons and entities presumed to have insurable interest. They fall into three general categories – relations by blood or marriage, business relationships, and creditors.

Blood or Marriage: People generally have an insurable interest in the lives of their spouses and dependents. Based on this relationship, the general rule of thumb is:

Insurable Interest
Husbands and wives
Parents and children
(including adopted children)
Grandparents and grandchildren
Brothers and sisters
Engaged couples (some states)t
No Insurable Interest
Other relatives by marriage
Nieces and nephews
Cousins
Uncles and aunts
Stepchildren and stepparents

Business Relationship: An insurable interest may be created in an otherwise non-insurable interest relationship by the creation of a financial dependency or a business relationship between the parties. For example, an uncle may be deemed to have an insurable interest in a nephew because the uncle’s business is run by the nephew and the business, as run by the nephew, is making a lot of money for the uncle.

One who receives economic benefit from the continued life and good health of another has an insurable interest in that person’s life. For example, employers can take out key person life insurance on key employees, corporations can take out insurance on the lives of their officers, business partners can take out life insurance on each other.

Creditors: Creditors are allowed to take out life insurance on the lives of their debtors, with the debtors’ consent, up to the limit on the debt. Mortgage and credit insurance are examples of this type of insurance.

Insurance companies have a duty to exercise reasonable care in determining whether insurable interest exists and whether the consent of the insured has been obtained. If they don’t, they may be sued.

For more information on life insurance contracts, read our section on Life Insurance.

Case Studies: Insurable Interest in Life Insurance Policies

Case Study 1: Protecting Family Members

John and Mary are a married couple with two young children. To ensure the financial security of their family, John takes out a life insurance policy with Mary as the beneficiary.

John has a clear insurable interest in Mary’s life because her well-being and financial stability directly affect him and their children. The life insurance policy provides peace of mind, knowing that if something were to happen to John, Mary and the children would be financially protected.

Case Study 2: Business Succession Planning

Bob and Mark are business partners who have built a successful company together. They rely on each other’s skills and expertise to run the business effectively. To safeguard their business in the event of an unexpected death, Bob and Mark decide to purchase life insurance policies on each other.

By doing so, they ensure that sufficient funds will be available to cover the financial implications of losing a key partner. In this case, their insurable interest arises from their shared business relationship and financial dependency on one another.

Case Study 3: Creditor Protection

Emily has taken out a substantial loan to finance the purchase of her dream home. The lending institution requires her to have a life insurance policy with the bank named as the beneficiary, covering the loan amount.

By doing this, the lender protects its financial interest in case of Emily’s untimely demise. This scenario demonstrates how creditors can have an insurable interest in the lives of their debtors, as the loan represents a significant financial obligation.

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Jeffrey Johnson

Insurance Lawyer

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Insurance Lawyer

Mary Martin

Published Legal Expert

Mary Martin has been a legal writer and editor for over 20 years, responsible for ensuring that content is straightforward, correct, and helpful for the consumer. In addition, she worked on writing monthly newsletter columns for media, lawyers, and consumers. Ms. Martin also has experience with internal staff and HR operations. Mary was employed for almost 30 years by the nationwide legal publi...

Published Legal Expert

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

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