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What Is Insurable Interest in Life Insurance?

If you watch Hollywood films, you might think you can take out an insurance policy on just about anyone and benefit from it when they pass. But the truth is that insurance companies are picky when it comes to who can insure another person’s life.

That can create challenges for people who share lives and expenses but never tie the knot. And that’s where insurable interest comes in. If you’re wondering, “What is insurable interest in life insurance,” you’ve come to the right place. Here’s what you need to know when taking out an insurance policy on someone you’re not related to.

What Is Insurable Interest in Life Insurance?

Insurable interest is a term used by life insurance companies to define who is eligible to take out a life insurance policy on another person. Here is how the government answers the question, “What is insurable interest?”

Insurable interest: “Insurable interest" is an insurance term which applies to someone who would reasonably expect to derive financial benefit from your continued life.

In other words, you can insure someone’s life if you can prove that their passing would negatively affect your finances.

When Must Insurable Interest Exist?

When you’re married to someone, you don’t need to prove insurable interest when taking out a life insurance policy. That’s because it is already assumed that you are financially dependent on each other.

But that’s not true in all relationships. That’s why it’s important to answer the question, “When must insurable interest exist?”

Here are some instances when you may have to prove insurable interest:

Insurance on Parents and Grandparents

Some families purchase life insurance policies for family members because their passing would impact their lives. For instance, a grandparent may continue to support their grandchildren. Likewise, if a parent does not have assets to leave their children when they pass, the children may decide to take out a life insurance policy so they will receive some kind of inheritance when they do.

Finally, some adult children purchase final expense insurance for their parents to help them cover the cost of their funeral and any outstanding debt.

Insurance on Partners/Fiancées

Many people are choosing to cohabitate these days instead of opting for marriage. That presents a unique challenge when it comes to life insurance. These couples must prove to the insurance company that their financial lives are intertwined.

For instance, the person who wants to take out a policy on their partner can show a lease in both parties’ names, supply a car payment for an automobile that is owed by both people in the couple, or prove that they are engaged and about to be married.

Insurance on Business Partners or Employees

Another answer to the question, “When must insurable interest exist in a life insurance policy?” has to do with business. A business partner may want to insure their partner because if something happened to them, it would be difficult to operate the business. Likewise, an employer may want to take out an insurance policy on an employee who would be hard to replace.

Examples of Insurable Interest

To give you a clearer example of when insurable interest is required and would likely be easy to prove, here are instances of when that might happen:

  • A couple has lived together for years and shares rent, food, utility, and other debt obligations. This is proven because both of their names are on all paperwork
  • An adult child takes out a final expense whole life insurance policy on an ailing grandparent or parent because they would be responsible for the final expenses.
  • A business partner takes out a policy on the other partner because the company could not function if they were to pass.
  • An unmarried couple has a child together, and one partner takes out a policy on the other.

Conversely, there are also some instances when it may be difficult to prove insurable interest. In these situations, the policy application would likely be challenged by the insurance company:

  • A couple has only dated for a short time and does not live together or share any expenses.
  • An in-law wants to take out an insurance policy on their new son-in-law or daughter-in-law. They are not financially connected with them.
  • A friend of an elderly person tries to take out an insurance policy on their life, knowing that the friend is in poor health and will likely pass soon.
  • Someone tries to purchase life insurance on a stranger.

What's Next?

To begin, you will need to speak to a life insurance agent. Lincoln Heritage Life Insurance has agents ready to answer your questions and offer you a free quote.

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