Insurable interest is required for every sort of insurance and refers, in general, to the financial interest that one has in something or someone that is covered. For instance, if anything were to happen to your automobile, you might lose a significant amount of money. To protect yourself against this possibility, you could get auto insurance that would cover repairing any damage caused by accident.
If you get life insurance, the policyholder is the one who gets to designate the beneficiaries. If you die away, the death benefit will be given to one or more beneficiaries. Insurable interest indicates that the policyholder will profit more from the continued existence of the covered person than from the insured person's death.
When it comes to your own life, you are seen as having a limitless insurable interest in it. As a result, you can buy a life insurance policy for yourself and choose anybody you want to be the beneficiary of the policy. However, to purchase a life insurance policy on someone else, you must demonstrate an insurable interest in that person.
For instance, your children and spouse certainly have an insurable interest in continuing your life (and vice versa). This is not only due to your emotional connection with them but also because they depend on your income or other family contributions.
Others may have insurable interests only for economic reasons. For example, your business partner or, in certain instances, your employer may have an insurable interest in your life. If you suddenly passed away, they would be fully responsible for the financial aspects of continuing to manage the firm or finding someone else to take your place.
When Insurable Interest Exist?
If you wish to get life insurance policy, you must demonstrate to the life insurance company that you have insurable interest in the person who will be covered. Only then will the firm sell you a policy. Your insurance carrier will evaluate your application, and if there is not an insurable interest discovered, your application may be rejected. When you buy life insurance policy on someone else's life, one of your primary concerns should be demonstrating an insurable interest in the policy.
However, after coverage has been established and the contract has been finalized, insurable interest is no longer required to be maintained. To put it another way, the policyholder and any beneficiaries do not have to continue to have an insurable interest to be eligible for the life insurance payments. Consider the case of a husband and wife who eventually part ways with each other. When married, both partners have an insurable interest in one another. This means that either partner may purchase life insurance policy on the other and designate themselves as the policy's beneficiary. Consider the scenario in which the woman obtains such insurance throughout their marriage; however, the husband passes away several years after the couple has divorced.
Life Insurance Without an Insurable Interest
The policyholder may lose insurable interest in the covered individual for various reasons, including but not limited to divorce. A life settlement or a viatical settlement is a frequent way for people to dispose of their life insurance policies.
In either scenario, a person who possesses a permanent life insurance policy sells the policy to a viatical or life settlement firm in return for a one-time cash payment to get the policy's cash value. The new owner of the insurance is the purchaser of the asset. They will continue to pay the premiums and be eligible to receive the death benefit if the covered individual dies.
Another sort of policy as stranger-oriented is held by a person who does not have an insurable interest (STOLI). STOLI insurance is acquired for the benefit of a "stranger," sometimes known as a person unknown to the insured. This is a key distinction between STOLI policies and those offered in life or viatical settlements.
