Insurable Interest
Insurable interest is a legal requirement that the person purchasing insurance must have a financial stake in the insured person or property, ensuring they would suffer a genuine loss if the insured event occurs.
Exam Tip
LIFE = insurable interest at APPLICATION. PROPERTY = insurable interest at LOSS. Spouses, parents, children = automatic interest.
What is Insurable Interest?
Insurable interest means you have a legitimate financial interest in the life, health, or property being insured. You would suffer a real financial loss if the insured person died or the property was damaged. This requirement prevents insurance from becoming a gambling contract.
Why Insurable Interest Exists
| Reason | Explanation |
|---|---|
| Prevents Gambling | Insurance is not a bet on someone else's life |
| Reduces Moral Hazard | Prevents incentive to cause a loss |
| Legal Requirement | Required for valid insurance contract |
| Public Policy | Protects against fraud and harm |
When Insurable Interest Must Exist
| Insurance Type | When Required |
|---|---|
| Life Insurance | At time of APPLICATION only |
| Property Insurance | At time of LOSS |
| Health Insurance | At time of application |
Life Insurance - Who Has Insurable Interest?
| Relationship | Insurable Interest? |
|---|---|
| Yourself | Yes - always |
| Spouse | Yes - automatic |
| Children | Yes - automatic |
| Parents | Yes - automatic |
| Business partner | Yes - financial stake |
| Key employee | Yes - with employer consent |
| Creditor in debtor | Yes - up to debt amount |
| Random stranger | NO - never |
Property Insurance - Examples
| Example | Insurable Interest |
|---|---|
| Homeowner | Yes - owns property |
| Renter | Yes - personal property inside |
| Mortgagee (lender) | Yes - financial stake in property |
| Business owner | Yes - business property |
| Stranger to property | No |
Key Differences: Life vs. Property
| Factor | Life Insurance | Property Insurance |
|---|---|---|
| When tested | At application | At time of loss |
| Amount limit | No strict limit | Cannot exceed property value |
| Can policy continue? | Yes, even if interest ends | No coverage without interest |
Example Scenario
Life Insurance: A divorcing couple:
- Wife buys policy on husband while married (insurable interest exists)
- Later divorce (interest may end)
- Policy remains valid because interest existed at APPLICATION
Property Insurance: Same couple:
- Wife insures vacation home jointly owned
- After divorce, she gets sole ownership
- Her insurable interest continues
- Ex-husband's interest ends (he can't make claim)
Exam Alert
For LIFE insurance, insurable interest must exist at APPLICATION. For PROPERTY insurance, it must exist at the time of LOSS. Know the relationships that create automatic insurable interest.
Study This Term In
Related Terms
Beneficiary
InsuranceA beneficiary is a person or entity designated to receive the death benefit or proceeds from an insurance policy or retirement account.
Premium (Insurance)
InsuranceAn insurance premium is the amount paid by the policyholder to the insurance company for coverage, typically paid monthly, quarterly, or annually.
Underwriting
InsuranceUnderwriting is the process by which an insurance company evaluates risk and determines whether to accept an application for coverage and at what premium rate.