Insurable interest in life insurance
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If you want to buy life insurance for another person, you must first prove you have an insurable interest in their life. Insurable interest means you will face a significant emotional, financial or other type of loss that will negatively impact you upon the insured’s death. The insured also has to consent to the purchase, which is usually done by signing a form attesting to the life insurance company they are aware someone is purchasing the policy on their life.
What is insurable interest in life insurance?
Even if you can afford to, you cannot take out a life insurance policy on anyone you choose. When it comes to taking out a life insurance contract on someone other than yourself, life insurance companies require you to first prove you have an insurable interest in the insured person. To have insurable interest most typically means you are financially dependent or would have financial hardship if the insured person were to pass away.
For example, Bob and Sally are married and have two children. Both Bob and Sally work, but Sally only works part-time, so she can also take care of the children. Bob takes out a life insurance policy on Sally’s life because he can prove that losing Sally would cause him financial hardship. He would either have to quit his job, take on different hours or hire someone to care for the children while he worked. The same would be true if Sally took out a life insurance contract on Bob’s life. The death benefit would help Sally and the children maintain their lifestyle up to the policy’s limits without Bob’s financial assistance, while allowing Sally time to adjust to depending on just her income alone.
Insurable interest is most common in immediate family relationships, though other relationships can qualify as insurable interest:
- Children (adopted or natural)
- Grandparents and grandchildren
- Corporations and business partnerships
What is proof of insurable interest?
Proof of insurable interest is part of the initial life insurance application. Insurable interest and consent of the insured person (if different from the policyholder) is a requirement before a life insurance company can approve and issue a life insurance contract. This can be done in person by verifying the identity and relationship of the policyholder and insured person. A phone interview may also be conducted between the life insurance company and the person buying insurance or the person listed as the life insurance beneficiary.
If you purchase a life insurance policy as the policyholder and insured, insurable interest automatically exists for you and your beneficiaries. In a direct relationship, either through blood, marriage or adoption decree, insurable interest is generally easy to prove based on the relationship status. In a business partnership, such as a corporation purchasing a life insurance policy on a key officer, a business contract or other form of proof that the company will experience financial hardship and loss upon the insured’s death is needed.
What if you do not have insurable interest?
If you do not have an insurable interest in the insured person, you cannot buy a life insurance policy. Proving insurable interest also requires consent and acknowledgement from the insured person that the policy owner wants to take out a life insurance contract on their behalf. This prevents someone from taking out a life insurance policy on someone without their knowledge.
When you are both the policy owner and insured, insurable interest is absolute for both the insured person and the chosen beneficiary. If the insured does not designate a beneficiary, anyone seeking the insured’s death benefit will also have to prove insurable interest when the insured person passes away. These safeguards are in place to prevent life insurance company insolvency from death benefit payouts and increases in the cost of life insurance.
Sometimes, insurable interest cannot be proven. For instance, you would not be able to take out a life insurance policy on your elderly neighbor just because they are sick and may die soon if you cannot prove you would face financial hardship after they pass. Similarly, while your spouse has an insurable interest in your life and can take out a life insurance policy with your consent, they cannot name their best friend as the beneficiary, since they will not face financial loss upon your death.
Types of life insurance
When you take out a life insurance policy, you have several choices to make. The amount of coverage and the type of life insurance needed are the first decisions to make.
- Term life insurance: Term life insurance offers temporary coverage. The coverage amount and premium paid stay the same for a certain length of time, usually between 10 and 30 years. You can choose to renew the policy at your current age when it expires, convert it into a permanent life insurance policy, or let it cancel if you no longer need the coverage.
- Permanent life insurance: Permanent life insurance provides coverage for the rest of your life as long as the premiums are paid. The initial cost is higher, but it can be more cost-effective if you outlive the term policy. While term life may be a good choice to cover temporary needs like debts and childcare, permanent life insurance is good for building cash value and covering end-of-life needs, like funeral expenses.
Frequently asked questions
Can you buy life insurance on a parent without their consent?
You can buy life insurance on a parent, but not without their consent. Life insurance on a parent is worth considering if you will incur costs — whether for medical bills, funeral expenses or other costs — you cannot afford when they pass. You can use the life insurance death benefit to pay for various expenses.
Can you buy life insurance on your child’s mother or father?
If you can prove insurable interest and have consent from your child’s parent, you can buy life insurance on your child’s mother or father. If your co-parent provides alimony or child support payments, that could prove insurable interest for an ex-spouse. If you or your child would experience financial hardship because their other parent passes away, this also demonstrates insurable interest.
When must insurable interest exist in life insurance?
When buying life insurance, insurable interest must exist at the time the life insurance policy is purchased. If the policyholder and insured person are different, both the policyholder and named beneficiary must have an insurable interest and prove financial loss and hardship if the insured were to pass away.