How Insurable Interest works in Life Insurance

Insurable interest is the pecuniary interest; the insured must have an insurable interest in the life to be insured for a valid contract insurable interest arises out of the pecuniary relationship that exists between the policy-holder and the life assured so that the former stands to lose by the death of the latter and/or continues to gain by his survival.

If such relationship exists, then the former has insurable interest in the life of the latter.

The loss should be monetary.

Mere emotion and expectation do not institute insurable interest in the life of his friend or father merely because he gets valuable advises from them.

General rule of insurable interest in life insurance

  • Time of insurable interest: The insurable interest must exist at the time of proposal. Policy, without insurable interest, will be wager. It is not essential that the insurable interest must be present at the time of claim.
  • Services: Except the services of wife, services of other relatives will not essentially form insurable interest.There must be financial relationship between the proposer and the life assured. In other words, the services performed by the son without dependence of his father, will not constitute insurable interest of the father in the life of his soil.

    Vice-versa is not essential for forming insurable interest.

  • Insurable interest must be valuable: In business relationship the value or extent of the insurable must be determined to avoid wager contract of the additional insurance. Insurance is limited only up to the amount of insurable interest.
  • Insurable interest should be valid: Insurable interest should not be against public policy and law should recognize it. Therefore, the consent of life assured is very essential before the policy can be issued.
  • The legal responsibility may be basis of insurable interest: Since the person will suffer financially up to the extent of responsibility, the proposal has insurable interest to that extent for instance, a person will be under legal responsibility to expense at the funeral of his wife and children, and he can purchase insurance in their lives up to that extent.
  • Insurable interest must be definite: The insurable interest must be present definitely at the time of proposal. Mere expectation of gain or support will not constitute insurable interest.
  • Legal consequence: The insurable interest must be there to form legal and valid insurance contract without insurable interest would be invalid.

After taking these rules in to account the insurable interest principle in life insurance can be divided into two categories: insurable interest in own life, and insurable interest in other’s life.

The latter is sub-divided into two classes: where proof is not required, and where proof is required.

Again, this insurable interest is divided into two classes: insurable interest arising due to business relationship, and insurable interest in family relation.

Insurable interest in one’s own life

An individual always has an insurable interest in his own life it does not need any verification of proof. Every man is presumed to possess an insurable interest in his estate for the loss of his future gains or savings, which might be the result of his premature death.

According to the definition of insurable interest, it is also evident that the person will continue to gain financially while lie is surviving and will suffer loss if he is dead because he will be unable to earn or protect the property.

The insurable interest in own life is boundless because the loss to the insured or his dependents cannot be measured in terms of money and, therefore, no limit can be placed to the amount of insurance that one may take on one’s own life.

Thus, ideally, a person can take a policy to any unlimited amount on his own life; but in practice no insurer will issue a policy for an amount larger than amount seems suitable to the circumstances and means of the applicant generally, it is mentioned that one cannot purchase policy usually more than ten times of his one year’s income.

Third party can pay the premium if there was no intention to speculation. If there is possibility of wager, the contract will become void.

Insurable interest in other’s life

Life insurance can be affected on the lives of third parties provided the proposer has insurable interest in the third party. There are two types of insurable interest in other’s life. First where proof is not required and second, where proof is required,

Proof not required

There are only two such cases where the presence of insurable interest is legally presumed and therefore need not be proved.

Wife has insurable interest in the life of her husband

It is presumed and decided by reed vs. Royal exchanged 795) that wife is presumed to have insurable interest in the life of her husband because husband is legally bound to support his wife.

The wife will suffer financially if she husband is dead and will continue to gain if the husband surviving.

Since, the extent of loss or gain cannot be measured in this case, the wife has insurable interest in the husband’s life up to an unlimited extent.

Husband has insurable interest in the life of his wife

The insurable interest is presumed to exist here and no proof is required. It was decided in griffith vs. Fleming (1909) that the husband has insurable interest in his wife’s life because of domestic services performed by the wife.

If the wife is dead, husband has to employ other person to render the domestic services and certain other financial expenditures will involve at her death which are not calculable.

The husband is benefited at the survival of his wife, so it is self-proved that husband has insurable interest in his wife’s life.

Since the monetary loss at her death or monetary gain at his survival cannot be measured; there is unlimited insurable interest in the life of wife.

Proof is required

Insurable interest has to be proved in the following cases;

Business relationship. The policy-holder may have insurable interest in the life of assured due to business or contractual relationship. In this case, the amount of insurable corresponds with the amount of risk involved. Some of such examples are narrated below:

A creditor has in the life or his debtor. The creditor may lose money if (he debtor dies before the loan is repaid.

The continuance of debtor’s life is financially meaningful to the creditor because (he latter will get all his money repaid at the former’s survival.

The maximum amount of loss to a creditor may be the amount of outstanding loan plus interest thereon and the amount of premium paid; so, the maximum amount of insurable interest is limited to the outstanding loan, plus interest and amount of premium expected to be paid.

The interest is calculated on the estimation of duration of debt to be paid.

The maximum amount of interest does not say about the payment of policy amount, it, merely, determines the chances of speculation. The full amount of policy is payable irrespective of the payment of loan and interest. Since it is life insurance, the full policy amount is paid.

A trustee has insurable interest in respect of the interest of which he is trustee because at the survival of the other person the trustee is benefited and at his death he will suffer.

A surety has insurable interest in the life of his principal. If the principal (the debtor) is dead, the surety is responsible for payment of outstanding loan, or obligated amount.

At the survival of principal, he will not suffer this loss. The insurable interest is limited up to the amount of outstanding loan, interest and premium paid.

A partner has insurable interest in life of each partner. At the death of a partner, the partnership will be dissolved and the surviving partner will lose financially.

Even if the firm continues at the death of the partner, the firm has to pay deceased partner’s share to his dependents; this will involve a huge financial loss to the partnership.

Therefore, the firm collectively can purchase insurance policies in the life of each partner of the firm: since the firm part of money up to the extent of deceased partner goodwill, capital, share of profit and reserve the firm has insurable interest up to the extent in each partner.

Similarly, all the partners have insurable interest in life of each partner because they will financially suffer at a death.

An employer has in the life of a key-man. A key-man is the person whose presence, capital, capacity cause profit to the business. If the key-man is dead, the business will reduce profit up to a certain extent.

The business suffers reduced profit, expenses involved in appointing and training new persons and the amount to be given to the dependents of key-man at his death. So the business has insurance interest up to such extent in the key-man’s life.

An insurer has in the life assured. The insurer suffers at the death of life assured and, therefore, he can get reinsurance of the assured persons by him. The insurable interest is limited up to the policy amount.

Family relationship

The insurable interest may arise due to family relationship if pecuniary interest exists between the policy-holders and life assured because mere relationship or tics of blood and of affection does not constitute insurable interest, proposer must have a reasonable expectation of financial benefit from the continuance of the life of the person to be insured or of financial loss from his death.

The interest must be based on value and not on mere sentiments.

Similarly,

mere moral obligation is not sufficient to warrant existence of insurable interest although legal obligation to get support will form insurable interest of the person who is supported ia life of the person who is supporting.

Thus,

a son can insure his father’s life only when he is dependent on him and the father can take insurance policy on his son’s life only when he is dependent on his son.

Insurable interest in life insurance indicates that the insured must have an pecuniary interest in the life to be insured for a valid life insurance contract.