Life insurance is one of the most important forms of investment someone can make.
It essentially ensures the financial security of anyone who depends on you. This also makes it one of the most popular types of investments since most people want to be sure their loved ones are safe no matter the circumstances.
Typically, most people name their families as the beneficiaries. In the event of any untoward incident, they aren’t left financially stranded or helpless. This is the aim of life insurance.
That is why it is considered to be one of the most forward-thinking investments you can make. The returns are not immediately obvious. But take a step back and look at the bigger picture. You will notice exactly how far-reaching its benefits are if you use an insurable interest in life insurance too.
All that said though, purchasing an insurance plan comes with certain conditions.
The most important of these are a medical examination and insurable interest. To an average person, these terms might not make much sense and that’s exactly where we come in to help.
Having these requirements may seem like an inconvenience for you. But if you follow along with this article, you will very quickly grasp why and what you need to know while applying for life insurance.
We’re going to take a look at what an insurable interest in life insurance means for you as a consumer.
Why is an insurable interest in life insurance important?
The insurance industry is a big one. As with any industry of this size, there is no shortage of people trying to game, cheat or exploit the system. This usually results in large-scale illegal insurance fraud.
Insurance fraud causes the entire industry a loss of around $40 billion every year in the US alone. Because of this, the premiums that every other honest person pays increases by a lot.
In short, the people taking advantage of the system actually forces the ones making sincere payments to pay more every single year.
An insurable interest in life insurance is not only used to combat fraud. It also prevents the person the insurance belongs to from harm.
For example, someone with malicious intent could sign you up for life insurance. They could do this without your knowledge and consent. Later, they could have you killed to get the insurance money.
This is not an unusual practice, according to Daily Mail a man is accused of killing his first and second wife for insurance money.
This person has no vested interests in your survival and would profit the most from your death. This is the exact situation an insurable interest in life insurance prevents.
Both in the past and in current times, there have been several cases of deliberate fraud. All because of the temptation of money.
Most of these attempts have been shut down in their tracks. Without stringent background checks, this wouldn’t have been possible and the practice would be routine.
Additionally, having an insurable interest in life insurance is very important as, without it, the policy would be void. Providing an insurance policy without one is not legally allowed, as it can actively encourage murder. The result is that providers scrutinize every detail for every life insurance application they receive.
How exactly is an insurable interest defined?
The easiest way to explain this would be to say that the person taking out your insurance needs to have an interest in your survival.
That is why providers will have no problem awarding the life insurance in such a case.
The people this applies to is anyone directly related to you, either by blood or by law. Spouses, siblings, parents of children (this includes non-biological parents as well), all come under the category of having an insurable interest. The insurable interest on yourself is the maximum possible. The closer the person is related to you, the better.
More distant relatives, such as cousins, uncles/aunts or stepchildren are not considered to have an insurable interest. They tend to show very little benefit to the person the insurance is for. It is very unlikely that a life insurance will be offered under these circumstances.
It is important to note, however, that these situations can change if certain financial conditions are met. For example, funding your nephew’s education and living expenses. By investing in the future of this person, you have shown that the person’s health is important to you. That is why this situation is applicable for an insurable interest.
For example, funding your nephew’s education and living expenses. By investing in the future of this person, you have shown that the person’s health is important to you. That is why this situation is applicable for an insurable interest.
Another example is if the extended family member primarily manages the business belonging to the other. Their death could cause the business to suffer and as a result, cause monetary loss.
However, this doesn’t apply to complete strangers, you cannot name the beneficiary of your life insurance someone you just met but has your best interest.
In this case, the risks are too high.
Life insurance would be willing to cover such a scenario. It successfully demonstrates the worth of the person alive.
The existence of an insurable interest in life insurance varies greatly. It depends on various factors and depends on the proof you present.
This is why insurable interest changes from case to case. You should consult the agent while applying for help specific to your particular case.
Other cases where it is applicable
An insurable interest in life insurance also applies to individuals involved in some form of business agreement. If the business depends equally on both of them, an insurable interest is created.
As long as the business would suffer or deteriorate significantly due to an untimely death, the other person is eligible for life insurance.
For example, two individuals who have established a registered partnership. One is responsible for the financial aspects of this partnership. The other takes care of the logistics and management.
They fulfill different roles, meaning that the partnership would fail to exist in the case of one of them passing away. Life insurance will be provided in such cases. It is very obvious that both of them would want the other to continue running the partnership
A corporation could also choose to take up insurance against a high-level executive. Such an employee can often be single-handedly responsible for the growth of the company. As such, the corporation profits from the continued service of this individual far more than from a prospective insurance payout.
Lastly, money lenders, also known as creditors, can also take life insurance against borrowers. This is because the borrower’s death would cause them a monetary loss. They are only allowed to insure an amount equal to the borrowed amount. Any greater than that and they stand to benefit from the policy instead of the debt they gave out.
They are only allowed to insure an amount equal to the borrowed amount. Any greater than that and they stand to benefit from the policy instead of the debt they gave out.
Other factors affecting life insurance
In all of the aforementioned cases, a few general rules apply. This is why the person’s signature is very necessary during the application process.
Forging a person’s signature while applying for life insurance under their name is also considered insurance fraud and carries a strict punishment by the law.
In addition to proving an insurable interest in life insurance, we also mentioned the medical examination. Assuming that the person is healthy and fit, the medical examination will be smooth without any major hiccups. However, an unhealthy lifestyle might cause a reduction in the value for the insurance. It is important to keep that in mind searching for insurance.
The income of an individual also plays a role in the life insurance and is key in calculating the overall worth of the insurance. Someone with a higher income will naturally be granted an insurance with a greater value. This is because the recurring income that the beneficiary usually receives would be lost. The life insurance attempts to cover as much of this as possible.
Someone with a higher income will naturally be granted an insurance with a greater value. This is because the recurring income that the beneficiary usually receives would be lost. The life insurance attempts to cover as much of this as possible.
This also means that you have to be quite careful on who you name your beneficiary since the value of your insurance is boosted too.
As a consumer, you can be assured that no one will assign a price to your life and do as they please with it. For the insurance provider, this means that the rate of insurance fraud reduces dramatically.
Everybody else indirectly benefits from this as they will be able to pay lesser premiums and not subsidize insurance fraud.
Before purchasing an insurance, you should make sure that you can prove that your beneficiary will be at a financial loss.
A tragic incident in your life is something that affects those immediately close to you. Remember that the greater the amount of insurable interest you show, the more likely you are to receive the policy.
This means that your beneficiary is relying on your income, living in your home and has a lot to lose if something happens to you and has no interest into harming you.
You may need help with assessing your insurable interest in life insurance. Your provider will be more than willing to guide you through the process.
If you want to find out more about life insurance, don’t hesitate to take a look at our blog
We blog about insurance options for seniors, insurance options with no medical exam required and the best offers on the market.
If you have any questions don’t hesitate to contact us.