If you want to purchase a life insurance plan for another person, you should first prove that you have an insurable interest in their life. Insurable interest means that you will face a substantial emotional, financial, or another type of loss that will negatively affect you upon the demise of the life assured. Insurable interest can exist in various situations such as marriage. This interest is also evaluated by the life insurer during the application for the plan and before the payment of the death payout.Read more
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Let’s understand what does insurable interest mean in life insurance with the help of an example:
Anup Singh of 28-years recently purchased a pure term life insurance plan for himself and he has listed his wife as a nominee. And, he also wanted to buy another life cover at the same time for his best friend Raj Arora and wanted to appoint himself as the nominee. But his respective insurer informed him that he could not avail a plan for Raj as he had no insurable interest in life insurance plan.
You can take an insurable interest in your assets like a vehicle, home, or a piece of art. The amount that is covered is generally the market value of the object or property in question.
Insurable interest is the significant logic driving life insurance agreements. This term is used to define the relationship between the beneficiary (nominee) and the insured. It occurs when the nominee derives any kind of monetary benefit from the constant existence of the life assured and therefore suffers a financial loss in case of his or her death.
In the above-mentioned example, Anup was denied a life insurance plan for his friend Raj because he does not descend any monetary benefit from the existence of his friend.
Life insurance is an agreement or contract between the insurance company and the policyholder based on faith and trust. If there is no insurable interest in life insurance, anyone would be able to insure and receive the death benefit on anybody else’s death. Such cases could have terrible consequences, leading to fraud.
Insurable interest in life insurance ensures that no one takes undue advantage of your life insurance policy, thus reducing fraud cases. It also makes sure that your dependents are not repudiated of the sum assured amount and other policy benefits. In this, the relationship between the policyholder and the subject matter must be identified by law.
Your family members (Blood relations) and dependents: Your spouse, parents, children, and others, who are dependent on you financially have an insurable interest in life insurance. They will be exposed to financial or monetary risk in case of your absence. The death benefits received from your plan will help them fulfill several expenses, requirements, and square off responsibilities.
If Anup was in blood relation with Raj then Anup would have been able to prove insurable interest in Raj and avail a plan.
Your employer: Your employer also has an insurable interest in you. If you are an employee whose financial loss would cost the organization, it can avail a life insurance plan for you. As key person insurance, the employer pays the amount of premium and in the unforeseen event of your death, the employer gets the sum assured amount. The life insurance profits received are used by the employer for covering all the monetary losses arising because of your absence
Your Creditor: Your creditor can also avail of life insurance coverage on your life along with your consent. The sum assured amount cannot be more than the amount of debt.
Insurable interest in life insurance is usually present in blood relations but would not present in the following cases unless there is proof of financial dependency:
Uncles and Aunts
Nephews and Nieces
Stepparents and step-children
At what time the insurable interest must be present in the case of life insurance is an important concern for a policy buyer. Read on to know more in detail:
Proof of insurable interest in life insurance is required at the time of application filling and buying the policy. Life insurance is a tool that is used to make you whole again following the monetary loss of someone. Some individuals would be interested to buy a life insurance plan on a random individual to receive policy benefits if that individual passes away. This is because the principle of insurable interest in life insurance is created to make sure that life insurance was used appropriately.
Insurable interest is a non-negotiable feature of life insurance plans. Without this insurable interest, the plan can be considered denied or void. The policy buyer has to prove the existence of insurable interest. Proof should be presented at the time of application and the end of the plan when the life assured dies. As a thumb rule, for property insurance, the insurable interest must present both at the time of buying insurance and at the time of occurrence of loss.
To confirm the presence of insurable interest, a life insurer will generally talk to the policy buyer and beneficiary. They will examine the relationship to the proposed insurance buyer and check if there is an insurable interest. The policy would be denied at the time of application or the death payout would not be paid if there is no insurable interest.
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