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Who is an Insurable Interest for Life Insurance Purposes?

By on March 19, 2014 in Insurance, Life Insurance

Who is an Insurable Interest for Life Insurance Purposes?Insurable interest is one of those terms that you’ll almost never hear of outside of the insurance industry. But when it comes to insurance, it is virtually a requirement for any beneficiary you wish to name in your life insurance policy.

What is Insurable Interest?

By definition, insurable interest is represented by any person who might suffer a financial loss as a result of your death, though there are exceptions. Some of the more common people who you might list as beneficiaries on your life insurance – who are deemed to have an insurable interest – include the following:

Immediate family

Immediate family – your spouse and your children – are the most obvious people with an insurable interest. They are dependent upon either your income or care for their survival, which makes the insurable interest apparent.

Even if you are a nonworking spouse, the rest of your family are nonetheless an insurable interest because you provide care and services that will disappear upon your death. Outside parties and services may need to be brought in in order to provide the care you’ve been giving as a parent. This will create financial obligations for your survivors, even though they were not dependent upon your income.

 

Extended family

 

Extended family have an insurable interest by virtue of the fact that they are related to you by blood. Even if they are not dependent upon your income, they are still deemed to represent an insurable interest.

This can be especially true of your parents. Although they may not be dependent upon you at this point in their lives, that could change as they grow older and especially if one or both develops physical limitations that may require your help. You will be able to name them as beneficiaries in your life insurance policies, even though they are not immediately dependent upon your income.

 

Business partners

If you have people who you are partnered with in a business venture, that is also an insurable interest. No, business partners are not necessarily dependent upon your income, but the continuity of the shared business could be at stake in the event of your death. That alone creates an insurable interest.

There may also be certain services and contributions to the business that you provide that would lead to the business becoming impaired upon your death. By naming your partners as beneficiaries in your life insurance, you’re giving them the opportunity to rebuild the business when you’re gone.

Life insurance is also often used by surviving business partners to buy out the business interest of the deceased partner. The proceeds will be paid to the deceased partners family, providing them with additional financial support, while enabling the surviving partners to acquire full control of the business.

 

“Key employees”

 

If you have a business in which you have one or more very important employees – referred to as key employees – you are deemed to have an insurable interest on their lives by virtue of the fact that their contribution to your business is necessary.

This could be an employee who is in sales, whose production represents a significant percentage of your overall business. The death of the employee would impair your business and possibly even threaten it’s ability to continue.

Charitable organizations  

 

Charitable organizations are considered to be an exception to the insurable interest provision. You can name any charity of your choice as a beneficiary to your life insurance. You can even use the life insurance to create a trust that helps to fund the charity on an ongoing basis. The charity does not have to be dependent on your contributions in order to establish an insurable interest.

There are a relatively small number of parties deemed to have an insurable interest, and if you go outside of that circle with life insurance, the company may require that your beneficiary be changed.

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