While many people purchase life insurance policies for themselves in order to leave death benefits to loved ones, it is also possible to purchase a life insurance policy on another person. When looking at a life insurance application for someone other than the insured, insurance companies consider insurable interest.

Identification

In life insurance, insurable interest means that the person purchasing the insurance is at risk for a legitimate financial loss if the person named as the insured in the policy were to die.

Relationships

Some types of familial situations signify insurable interest, such as a spouse or life partner or a parent insuring the life of a child. In addition, an insurable interest may exist between a divorced couple if one pays the other alimony or child support.

Debts

Beyond family relationships, an insurable interest exists between a person who is owed a sum of money and the borrower. Two business partners may also claim insurable interest for life insurance.

Reasons

Insurable interest exists because life insurance is meant to recoup monies lost due to death, not to make a profit. Without insurable interest, the person who purchases a policy may stand to profit.

Effects

Life insurance companies usually deny an application if there is no proven insurable interest. In the unlikely event that a policy is approved and later shown not to have true insurable interest, the insurance contract is not considered legal, and the beneficiaries named in the policy are likely to not receive the death benefits.

Source:

Insurance Information Institute: Insurable Interst