Which of the following individuals must have insurable interest in the insured?
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Life insurance can provide valuable financial protection for your loved ones. But not just anyone can buy a life insurance policy on someone else. One important concept you’ll encounter when buying life insurance is “insurable interest.” Here’s what that means and how it affects your life insurance options. What Is an Insurable Interest?An insurable interest is an important and required component when someone is buying a life insurance policy, says Tanya Taylor, a CPA and founder and CEO of Grow Your Wealth. ”It means that a person would encounter financial hardship if the insured died,” she explains. Without an insurable interest, a person cannot purchase a life insurance policy on another person. Additionally, you must have consent from someone before you purchase life insurance on them, even if you clearly have an insurable interest. Taylor says that immediate family members such as a spouse, children or even aging parents would usually automatically qualify since they may rely on you financially. However, someone outside of your family, such as a business partner, would need to show additional documentation and obtain your consent before purchasing a policy on you. Examples of Insurable InterestTaylor provides two scenarios in which insurable interest can be established. 1. You and your spouse have young children and own a home. If either of you were to die, it could create financial hardship for the surviving spouse and children. Therefore, you both have an insurable interest in each other and can purchase life insurance for the other person. 2. You are a partner in a small business. Each business partner can purchase life insurance on the other so that they can fund the ongoing operation of the business if one partner dies. Related: The right life insurance for a business partner’s death An example that does not demonstrate insurable interestHere’s a scenario in which insurable interest cannot be established without additional proof. Your neighbor wants to take out a life insurance policy on you so that when you die they will receive the payout. Unless there is more to the story and your neighbor can prove your death would cause them financial hardship, they do not have an insurable interest and will not be able to buy a policy on your life, with or without your consent. Why Is Insurable Interest Important?One of the main benefits of life insurance is to provide financial protection for survivors who may suffer if the insured dies. “Insurance companies use insurable interest as their protection to prevent fraud and intentional illegal acts,” Taylor says. If this feature didn’t exist in an insurance policy, anyone could purchase a policy on someone else with ill intent. So, for example, a doctor could purchase insurance on a patient with a serious illness and be less inclined to treat them properly since they’d receive a large sum of money if they died. How Insurers Prevent Insurable Interest from Being Abused“Insurance is designed to cover losses, not enrich beyond the actual loss itself,” says Shane Canfield, CEO of WAEPA, a non-profit that provides life insurance for federal civilian employees. This, he explains, is the principle behind the concept of indemnification, or compensation for harm or loss. It’s a fundamental difference between insurance and gambling. That’s why rules dictate that a person can’t take out a life insurance policy on an acquaintance or stranger, as there is no financial impact from the insured’s death. If that were not the case, buying life insurance would be more like gambling and encourage fraud. Life insurance companies have specific rules built into their policies that define insurable interest. “This has developed over the years by practice and according to public policy and laws in each state,” Canfield says. Typically, the parties involved fill out a form and make an attestation that the facts are true. “For large policies, there may need to be a notary or other legal representation verifying the information,” he adds. The general rule is that for certain insurable interests, the person being insured is required to provide consent and sign the insurance authorization form and provide identification. If there’s questionable insurable interest, the life insurance company will ask more questions and require additional documentation to determine the relationship. If the responses to the questions are not satisfactory to the insurance company, it will deny the policy. Compare Life Insurance CompaniesCompare Policies With 8 Leading Insurers What is an insurable interest?For a party to seek insurance against a potential loss, the insured must have some form of interest in the insured property or be subject to a particular loss from an occurrence or event affecting the insured property or individual. This is known as having an insurable interest. An insurable interest may be any form or legal or equitable interest in the property, including security interests in the property as collateral. Individuals may have an insurable interest in the life of other persons, but the individual whose life is subject to the policy must agree to such coverage. In some situations, contractual rights or the potential to suffer damages from non-performance of a contract may give rise to an insurable interest. This is the case for professional liability coverage. Note: An exception exists to the insurable interest requirement for certain types of financial instruments. These instruments effectively insure against an occurrence in which the holder of the instrument has little or no financial interest. Example: One person cannot take out a life insurance party on a complete stranger without that persons permission. There must be some special relationship between the individuals to justify the policy. This could be a family or business relationship. In any event, the insured individual must generally agree for the insurer to issue a life insurance policy to a third party. In health and life insurance policies, the individual applying for the policy must have an insurable interest in the insureds life at the time that the policy takes effect. In property insurance contracts, the individual applying for insurance must have an insurable interest in the property at the time of loss to the covered property.
Next Article: Common Characterizations of Insurance Back to: INSURANCE LAW What is an Insurable Interest in a Sale or Lease Contract? Generally, the purchase or lessor in a sale or lease contract acquires an insurable interest in the subject of the contract upon execution of the agreement for lease or purchase.
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Discussion QuestionWhy do you think insurance contracts require that an individual have an insurable interest? Can you think of contracts that are similar to insurance policies that do not require a party to have an insurable interest? Hint: Think of the 2007 economic recession. Practice QuestionAmy is a huge fan of a popular singer, Justin. Though she has never met him, she would be distraught if anything were to happen to him. In the event of his untimely demise, she wants to make certain that she would be able to create a shrine and pay homage to the singer. Can Amy take out an insurance policy covering Justin's life? Academic ResearchWhich of the following has an insurable interest on the subject matter of the insurance?Principle of Insurable Interest:- According to this principle, the insured must have an insurable interest in the subject matter of the insurance policy.
Which of the following people does not have an insurable interest in an insured property?A spouse, child, and employer would therefore have an insurable interest in an insured. However, a neighbor does not have an insurable interest in a person merely because they are neighbors.
When must an insurable interest exist in life insurance?When buying life insurance, insurable interest must exist at the time the life insurance policy is purchased. If the policyholder and insured person are different, both the policyholder and named beneficiary must have an insurable interest and prove financial loss and hardship if the insured were to pass away.
Why must a person have an insurable interest in order to be a policyholder?When someone purchases life insurance, he or she must have an “insurable interest” in the insured. This means that the policyholder, i.e. the person who owns the policy and names the beneficiary or beneficiaries, will suffer financial loss if the insured dies unexpectedly.
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