What You Need To Know About Insurable Interest And Consent
There are several different reasons that you may want to purchase life insurance on someone else’s life, or that someone else may want to purchase life insurance on you. And most of the time a person’s reasons for wanting to buy a life insurance policy on someone else are well-intentioned and valid reasons, but unfortunately sometimes a person’s reasons are not so well-intentioned. If anyone was able to purchase a life insurance policy on anyone they wanted then they could buy a policy on someone who works in a dangerous profession, or worse someone who they intended to harm, because if the insured person were to lose their life the buyer would stand to make a profit from it. Because of this there are many requirements in place within the life insurance industry to ensure no one is purchasing a life insurance policy on someone else unless they have a reasonable right to do so.
Is Consent Required To Purchase A Life Insurance Policy On Someone Else?
The short answer to this is yes. Always. No one can purchase a life insurance policy on someone else unless the person whose life is being insured is aware that the policy is being purchased and consents to it. If you are planning to purchase a life insurance policy for someone else, you will be required to get their signature to do so. Consent stands as a protection against someone purchasing a life insurance policy on someone else with bad intentions.
In addition to the insured being required to consent to the purchase of the life insurance policy, they will usually also be subject to a health exam before a life insurance policy is issued. Even if you were able to somehow trick someone into signing their consent to purchase the policy, it is unlikely you would also be able to reasonably explain to this person why they would also need to complete a physical health exam.
What Is Insurable Interest?
Before you can understand the concept of insurable interest you must first understand the purpose of life insurance policies. Life insurance policies are designed to protect the insured person’s family or other close loved ones from financial harm because of the insured person’s death. Life insurance policies are typically purchased to help the insured person’s loved ones cover funeral costs (also known as final expenses), outstanding debts, replacement of income being lost to the family, paying off a family’s mortgage, future educational expenses for their children, etc.
The key factor here is that the beneficiary of the life insurance policy must be someone that will be hurt financially by the death of the insured. And that is simply what the term insurable interest is referring to. It is illegal for an insurance company to sell a life insurance policy to someone who does not have a clear insurable interest in the life of the insured. Insurable interest is another concept that is used by insurance companies to ensure there are no bad intentions connected to the purchase of the life insurance policy.
Who Has Insurable Interest?
So how do we determine if a person has the insurable interest required to purchase a life insurance policy on someone else? Well, there are many different things we can look at. The important factor to keep in mind is that the beneficiary of the policy must have something to lose financially in the event of the insured’s death – this means it could be a relative and it could be other close people within our lives who are not relatives. This also means that just because someone is our relative does not mean that insurable interest automatically exists. The most common scenarios in which insurable interest can be shown to exist are:
- Spouse / Life Partner – if you have a spouse or significant life partner it is very likely that you are each financially dependent on one another, meaning insurable interest exists.
- Ex-Spouse – at first it might sound shocking that your ex-spouse can have a life insurance policy on you, but if your ex-spouse is financially dependent on you for alimony or child support then insurable interest exists.
- Parents – children often have an insurable interest in their parents, so they can pay for final expenses, pay off any outstanding debt obligations, and sometimes to help provide an option to offset the cost of long term care.
- Children – the one exception to the requirement of insurable interest and consent is a parent purchasing a life insurance policy on a child. Insurable interest is automatically considered to exist because the parent would be responsible for any final expenses and it provides a parent with a way to protect their child’s financial future and future insurability by purchasing when they are young.
- Grandchildren – grandparents often purchase life insurance policies for their grandchildren as a gift to protect the grandchild’s financial future and often list the child’s parents as the beneficiaries and sometimes even as the owners of the policy.
- Roommates – maybe you live with someone who is not a significant other, spouse, or family member. Because a person financially relies on their roommate to assist with the rent or mortgage and other household bills, insurable interest clearly exists.
- Business Partners – business partners often purchase life insurance policies on each other to financially protect the business if one of the partners were to die. Doing this would allow the surviving partner to buy out the deceased partner’s share of the business from their beneficiaries and to continue to allow business to run as normal.
- Key Man – businesses are not limited to purchasing life insurance coverage for only partners, they may also have life insurance policies on “key employees”. A key employee is a person whose skills are so unique or valuable to a business that they would not be easily replaceable within the company.
- Others You Would Need To Protect – sometimes you can have insurable interest in a person who is not a relative, roommate, or business associate. Consider for example that you are the godparent of your best-friend’s children. If your best-friend were to die, you would now become financially and legally responsible for raising their children. In this example, insurable interest clearly exists between you and your best-friend.
In addition to determining whether you can purchase a life insurance policy on someone else, insurable interest will also determine how much life insurance coverage you can purchase on the insured. The amount of coverage you can purchase has to make sense. For example, you wouldn’t be able to purchase a million-dollar policy on your ex-spouse who would only be responsible for $250,000 of child support through the rest of your child’s childhood. Insurable interest requires that the amount of life insurance coverage you purchase on another person is not any higher than the financial impact the loss of their life would have for you.
If you need to purchase life insurance coverage on yourself, or on someone else, contact the licensed insurance agents of Magruder Insurance today. We will walk you through the process from start to finish and make sure you get the coverage you need.