YOU ASK:

What insurable interest requirements do I have to meet to qualify for life insurance?

WE ANSWER:

If you want to take out a life insurance policy on another person, you must provide evidence that you have an insurable interest in that person's life, or otherwise stated that you will benefit more from the continuation of their life rather than from their death.

The existence of insurable interest is a requirement imposed by law and by the insurers, when purchasing a life policy on a third party is concerned. Although each state has the freedom to create their own insurable interest laws, some general rules apply.

Blood relatives

  • Children are assumed to have an insurable interest in their parents' lives but that might change when they become financially independent.
  • It is generally assumed that parents have an insurable interest in their children's life. This is why a parent can usually purchase small amounts of life insurance on the life of their children without the child's consent.
  • A grandchild is deemed to have an insurable interest in the life of their grandparent.
  • Siblings are assumed to have an insurable interest in the lives of their brothers/sisters.

More distant blood relatives, such as aunt, uncle, niece, cousin are not deemed to have an insurable interest.

Marriage

  • Spouses are deemed to have insurable interest in each other's lives.
  • A person engaged to another is usually not assumed to have insurable interest in their partner's life but a few courts have made exceptions to the rule.
  • In-laws and foster children are not assumed to have insurable interest on the basis of family ties but can be recognized to have such on the premise of dependency.

Business

  • People in an employer-employee relationship or in relations of partnership who would suffer a financial loss at the insured's death. This does not usually apply to shareholders.
  • Business associates
  • Creditors are sometimes granted the right to purchase policies on debtors, given that the amount of insurance is more or less equal to the debt owed.

Insurance interest has to be present at the inception of the policy but need not be at the insured's death. Insurers are usually very stringent when it comes to evidence of insurable interest and if the policy owner is found to be lacking such, the contract can be declared void.

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