Insurable Interest in Life Insurance

Life insurance can help offer substantial financial protection to loved ones if the insured person passes away during the policy term. Naturally, insurers have several criteria regarding who can get life insurance to prevent insurance fraud.

One of the most important criteria is having an insurable interest in the person that the policy covers. The person purchasing the life insurance policy must have the potential to suffer financially from the insured’s passing to get a life insurance policy on that individual.¹ Read on to learn how insurable interest works, what it means for life insurance policies, and how to prove an insurable interest.

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What does insurable interest mean?

Insurable interest is the legal right to insure something because you would suffer a financial or personal loss if that person or property were lost or damaged.² For example, if you own a home, you have an insurable interest in the home since damage could cause financial losses through loss of property value and income used to repair the house. Similarly, if you own a car, you could suffer financial loss if the vehicle is damaged or stolen. Therefore, you have an insurable interest in the car.

Without an insurable interest, policyholders could take out insurance on people or property to profit from insurance payouts rather than protect against actual loss. Insurable interest can help insurers protect themselves against insurance fraud. Therefore, insurable interest is typically required for you to apply for an insurance policy.

What is insurable interest in life insurance?

In a life insurance policy, an individual is insured instead of an asset or property. As a result, insurable interest in life insurance is the emotional, legal, and financial interest a person has in a life insurance policyholder.¹

For example, if you are the primary earner in your family, your partner or dependent children may have an insurable interest in you. This is because they could experience significant financial turmoil without your income. Similarly, if you run a business, you may have an insurable interest in another business owner because the other owner’s death could impact the business’s performance. You must have an insurable interest in the insured individual to apply for life insurance on them.

How to prove insurable interest in life insurance

Proving an insurable interest in the insured individual is part of the life insurance application. Individuals are always considered to have an insurable interest in themselves.² Therefore, you can get a life insurance policy on yourself without needing to prove an insurable interest. Others can apply for a life insurance policy on you as well. However, they must prove that they have an insurable interest in you. The type of proof can differ depending on the relationship but will usually involve providing legal documentation proving the relationship exists.

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When insurable interest in life insurance exists

Here are some circumstances where insurable interest in life insurance may exist and how to prove insurable interest in each situation:²

Spouse: People are generally considered to have an insurable interest in their spouse. They can prove the relationship with a marriage certificate or domestic partnership registration.
Dependent relationship: Dependents always have an insurable interest in the person whose income they rely on. The dependent’s birth certificate or documentation of legal guardianship can offer proof of a dependent relationship.
Parents: You can get a life insurance policy for your parents with their consent to cover end-of-life costs like funeral expenses when they pass away.
Business partners: Businesses may be impacted by the death of a business partner, making each partner have an insurable interest in the others. A business license, partnership agreement, or shareholder agreement can serve as documentation of a business relationship.
Corporations: Corporations may be able to obtain life insurance on high-level employees, such as senior executives, since the death of one of these employees could significantly impact the company. A corporation can prove this with an employment contract, financial statements that display the employee’s financial importance, meeting minutes discussing the issue, and more.
Estate planning: Your estate plan’s beneficiaries can have an insurable interest in you. Trust agreements and wills can provide proof of this relationship if they name the beneficiaries.
Legal obligations: If someone owes you legal obligations, such as alimony or child support, you may have an insurable interest in the party that owes these obligations to you. Documents like court orders prove this relationship.
Debtor-creditor relationship: If you loan someone money, you have an insurable interest in them since you may not recover your loan if they pass away. You can prove this relationship with a loan agreement.

When is there no insurable interest in life insurance?

Here are some situations where there is no insurable interest, unless there is proof of financial dependence.

Those who do not financially depend on the insured: Anyone who does not depend financially on the insured may not have an insurable interest. This can include aunts, uncles, cousins, nieces, nephews, stepchildren, and stepparents.²
Strangers or those outside the family: For example, you typically can't apply for life insurance on a neighbor or coworker.
Excessive death benefits: Insurance companies usually won't let you apply for more coverage than your insurable interest, since that could allow someone to profit from a life insurance payout.

Learn more about life insurance

Life insurance can be an excellent investment, but you can’t apply for a policy on anyone. You must make sure you have an insurable interest and can prove it. In general, your spouse and anyone that depends on your income may have an insurable interest in you. Business partners, estate plan beneficiaries, creditors, and even your employer could potentially have insurable interests as well.

If any of the above situations describe you or you believe you have an insurable interest in someone else for another reason, talk with an Aflac agent today. Your agent can discuss your best options for helping to protect yourself and your loved ones with life insurance.

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