The Concept of Insurable Interest in Life Insurance

Insurable interest is a key principle in life insurance law. It is the requirement imposed by law (and by insurers) to prevent a “gaming” or “wagering” by one party on the life of another through insurance. Simply put, to insure the life of an individual, the applicant must have an insurable interest, i.e., a greater concern in the insured’s living than dying. Courts (and insurers) look for “a reasonable ground… to expect some benefit or advantage from the continuance of the [insured].”1 Stated in another manner, the public has an interest in preventing the contract of insurance where the applicant has no interest in the continuation of the insured’s life other than the prospect of profiting from the insured’s early demise.

Virtually everyone accepts that a person has an unquestionable insurable interest in his or her own life. “The mere fact that a man of his own motion insures his life for the benefit of either himself or of another is sufficient evidence of good faith to validate the contract.” Most applicant-insureds will face no insurable interest issue in obtaining life insurance. Nor will their naming of someone other than their estates as beneficiaries usually pose a problem because it is generally assumed that the insured will not name as a beneficiary someone who wished him harm or who would wager on his life.2 Of course, if the policy was obtained expressly for the purpose of wagering or if the policy was really purchased by and soon after issue assigned to the third party beneficiary, the courts will declare such a contract void.3 Public policy will not allow one to accomplish by fraudulent indirection what the law clearly prohibits one from doing directly.

Every state has either statutory law or case law on insurable interest and all require that either the beneficiary or applicant hold such interest at the inception of the contract. Most states do not require that either the beneficiary or assignee of a policy have an insurable interest. The majority of states hold that there is nothing conclusively illegal about an assignment to one who holds no insurable interest—even where the insured is paid value for the assignment.4 But some states do require that the assignee have an insurable interest—even though some of the same states allow the insured to name a beneficiary who does not have an insurable interest.

Because each state is free to create its own laws on insurable interests and because different state courts have come to different conclusions on the issue, it is impossible to develop rules that apply without question in every state. Most state laws do not question the insured’s insurable interest in his own life nor the interest of close relatives related by blood or law and bonded through natural love and affection with the insured. With respect to others, statutes favor persons who stand to profit by the insured’s continued life, suffer economic loss at the insured’s death, and who have more to gain by the insured’s continued life than death.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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