Insurable Interest - Life Insurance

Life Insurance

Insurable interest refers to the right of property to be insured. It may also mean the interest of a beneficiary of a life insurance policy to prove need for the proceeds, called the "insurable interest doctrine". Specifically, insurable interest is:

• An interest based upon a reasonable expectation of pecuniary advantage through the continued life, health and bodily safety of another person, and, consequently, loss by reason of their death or disability; or
• A substantial interest engendered by love and affection if closely related by blood or by law.

Insurable interest is no longer strictly an element of life insurance contracts under modern law. Exceptions include viatication agreements and charitable donations.

has an insurable interest in the life of that second person.

Legal guidelines have been established in many jurisdictions which establish the kinds of family relationships for which an insurable interest exists. The insurable interest of family members is assumed to be emotional as well as financial. The law allows insurable interest on the presumption that a personal connection makes the family member more valuable alive than dead. Thus, husbands/wives have an insurable interest in their spouse, and children have an insurable interest in their parents (and vice-versa). Brothers/sisters and grandchildren/grandparents are also assumed to have an insurable interest in the lives of those relatives. But cousins, nieces/nephews, aunts/uncles, stepchildren/stepparents and in-laws cannot buy insurance on the lives of others related by these connections.

UK Law

A person is presumed to have an insurable interest in his or her own life, preferring to be alive and in good health rather than being sick, injured or dead. The unlimited interest extends to the life of spouses (and since 2004 civil partners), even if there is no financial dependency.

UK law does not recognize other classes of so-called 'natural affection' however, thus:

• Parents have no interest in the lives of their children

• Siblings have no interest in the lives of their fellow siblings

• Children have no interest in the lives of their parents (not in England / Wales / NI though Scottish law recognizes this)

Nor is insurable interest recognized for cohabiting couples. Although many insurers will accept such policies, they could potentially be invalidated because they have not been tested in court. In recent years, there have been moves to pass clear statutory provisions in this regard, which have not yet borne fruit.

In practice these problems are solved by people assigning their policies or placing them in trust with named beneficiaries. If a person obtains an insurance policy on their own life, it is presumed that the person would only name a beneficiary who wants the insured to be alive and healthy. There is no requirement that the beneficiary have a proven insurable interest in the life of the insured when the insured has purchased the insurance.

In 2008, the English and Scottish Law Commissions tentatively proposed some reforms to the existing law, hoping to clarify the complex rules. Their preliminary recommendations included increasing the category of ‘natural affection’ to include dependent children and parents and also cohabitees. Officially this is still under review.