What Is Insurable Interest?
The insurable interest is when you (or a group) have an economic interest in the life of another person or in the continuation of a legal person (such as a company or organization) or an asset. The insurable interest also exists when you are interested in another person based on love and affection, as long as there is a blood or legal relationship involved, such as family or marriage.
In other words, if the insured person dies or the insured property is damaged or destroyed, you will suffer economic and / or emotional losses. But with an insurable interest, you can offset the risk or impact of that loss by buying insurance.
Definition and examples of insurable interest
Insurers use insurable interest to determine whether you or anyone else should be able to purchase an insurance policy. For example, the policy could refer to a car, a house, or someone's life. If someone without an insurable interest receives an insurance policy on something they do not own or a person who does not care, destroying that thing or person could benefit them financially.
Since this can lead to the willful destruction of property or even murder, insurers require that you have an interest in keeping the item or life that is being insured.
Common examples of Insurable Interest
There are several cases where you may have an insurable interest in a thing or person in your life. This includes insurable interests in
- Property: If you own a car, house, boat, jewelry, or any other property in which you have a financial interest, you have an insurable interest in that property. In other words, if it were damaged or destroyed, you would suffer a loss, and insurance can help offset or eliminate that loss by reimbursing repair or replacement costs. In this case, a property casualty insurance policy, such as a homeowners insurance policy, would be used to provide the necessary financial protection.
- Family Members: If you are married, for example, and depend on your spouse's income to survive, then you have an insurable interest in your spouse. Life insurance can be used to offset the financial loss that would result if your spouse died prematurely. And, of course, the same applies to you: life insurance can compensate your spouse if he dies prematurely. Most life insurers will issue coverage for any family member who has a financial interest in any other member, such as a parent, sibling, child, spouse, adult child with special needs, or grandchild.
- Employees: If your business operations or profitability depend heavily on a single employee or group of employees, insurance can reduce the loss should something happen.Your business may decide to purchase life insurance policies and / or disability of a key employee or employees. This will allow your company to meet its financial obligations until the insured persons are replaced. A great company can adopt great policy on its CEO and board of directors for this reason.
- Yourself: Of course, you are considered to have an unlimited insurable interest in yourself and therefore you can take out an insurance policy for your own life and name whoever you want as the beneficiary. For example, if you want to leave an inheritance for your children, you can buy life insurance for it.
How does insurable interest work?
Insurable interest, in this sense, has nothing to do with earning interest as it would with a bank account or a fixed income security. Consider whether you would suffer financially from the loss of someone or something in your life or whether you would lose money from property damage. If you want, you can have an insurable interest in the continued existence of that person, group, or thing. And that interest can be protected with life and / or disability insurance, or property insurance.
A common requirement
All life insurers require the prospective owner to demonstrate an insurable interest before issuing a policy.
Insurable interest is required in insurance contracts because it prevents people from making money by losing something they have nothing to do with. For example, you cannot buy an insurance policy for your neighbor's car if you realize that he or she is a bad or reckless driver. You also cannot purchase life insurance for a stranger.
One-Time Approval for Life Insurance
Insurable interest should only exist when a life insurance policy is first issued. No need to continue after the policy goes into effect. For example, a husband who takes out a policy against his wife and calls himself the beneficiary may demonstrate an insurable interest at the time of application. But if they divorce and he is still the beneficiary, he will continue to receive the death benefit if his ex-wife dies (and the policy has not expired).
However, for property insurance, such as a car insurance policy, the insurable interest must exist both when the policy is purchased and when any loss occurs.
Enjoy Watching This Video About Insurances
Source: The Business Professor
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