Insurable interests are based on the relationship between the policyholder and the insured. These types of relationships fall into three broad categories: blood relatives, marriage, and business relationships.
The following blood relationships will generally give rise to an insurable interest:
A parent usually is deemed to have an insurable interest in his or her child’s life. A child usually is deemed to have an insurable interest in his or her parent’s life. (But once the child becomes a financially independent adult, it is not certain that all courts would hold that the blood relationship alone would be sufficient to meet insurable interest tests). A grandchild usually is deemed to have an insurable interest in the life of a grandparent. A grandparent usually is deemed to have an insurable interest in the life of a grandchild.
Siblings usually are deemed to have an insurable interest in the life or lives of brothers and sisters. Other relatives, such as an aunt, uncle, niece, nephew, or cousin, generally are not deemed to have an insurable interest merely by virtue of their blood relationship (but may have an insurable interest arising out of a business or financial transaction or out of financial dependency on the insured).
Spouses have an insurable interest on each other’s lives, and a few courts have held that a person engaged to another has an insurable interest in the other’s life. Other individuals related to the insured by marriage are usually deemed not to have an insurable interest based solely on a marriage relationship (but may have an insurable interest based on financial dependency). In-laws, for example, or step-sons or daughters, or foster children have no per se insurable interest based on family relationships but can obtain insurable interest because of dependency.
Any legal entity (which may include natural persons and businesses, whether incorporated or not) that would suffer a financial loss at the insured’s death will usually be deemed to have an insurable interest, though the amount of coverage must bears a reasonable relationship to the loss that would be suffered at the death of the insured. Business relationships which are commonly insured include:
- an employer insuring an employee;
- an employee insuring an employer;
- a partner insuring a partner;
- a partnership insuring its partners;
- a surety insuring the life of his principal;
- a member of a commercial enterprise insuring an individual whose death would adversely affect the financial stability or profits of the enterprise.
Although a business generally has an insurable interest in the lives of officers, directors, and managers, or others on whose continued life or lives the business’ success may depend upon, a corporation may not have insurable interest in the life of a shareholder who has no working or other financial relationship with the business. The point is that it is not the mere legal relationship that creates the insurable interest, but rather the “existence of circumstances which arise out of or by reason of” the entity.
Where business associates have insured each other to fund a purchase of the business interest at the insured’s death or the business itself has insured an owner to fund a purchase of that person’s interest at death, usually there will be an insurable interest.
Creditors have been allowed to purchase policies on debtors as long as the relationship between the amount of insurance and the debt were proportionate. But at the point where the transaction was more of a wager than an effort to secure a debt (decided on a case-by-case basis), the policy is void as lacking insurable interest. So the closer the insurance amount is to the debt owed, the more likely insurable interest will not be an issue. (However, once the policy has been issued to a creditor, the creditor typically is allowed to keep the entire amount of the proceeds even if the amount exceeds the debt.)
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM