2.2.5 Insurable Interest
Insurable interest is established when there is a reasonable expectation of monetary benefits from either the continued existence of the insured person or entity or from the loss of the insured person or entity.
The policyowner must have a valid financial interest in the person or item being insured at the time of contract purchase, not necessarily at the time of claim. However, the consent of the insured person is required. Insurance would be unenforceable and considered a wager (or bet) if the policyowner did not have an insurable interest in the insured.
A person has an insurable interest in something when loss or damage to the insured would cause that person to suffer a financial loss or certain other kinds of losses.
For example, if the house you own is damaged by fire, the value of your house has been reduced, and whether you pay to have the house rebuilt or sell it at a reduced price, you have suffered a financial loss resulting from the fire. By contrast, if your neighbor's house, which you do not own, is damaged by fire, you may feel sympathy for your neighbor and you may be emotionally upset, but you have not suffered a financial loss from the fire. You have an insurable interest in your own house, but you do not have an insurable interest in your neighbor's house (as illustrated in this example).
So we've learned that a basic requirement for all types of insurance is that the person who buys a policy must have an insurable interest in the subject of the insurance. People are presumed to have an insurable interest in any property they own or which is in their possession. For purposes of life insurance, everyone is considered to have an insurable interest in their own life as well as in the lives of their spouses and dependents. 
For property and casualty insurance, the insurable interest must exist both at the time the insurance is purchased and at the time a loss occurs. For life insurance, the insurable interest only needs to exist at the time the policy is purchased.
Since a policyowner must have an insurable interest in the insured at the time the policy is purchased, individuals cannot arbitrarily take out a life insurance policy on anyone they want. If that were the case, then everyone could take out a policy on anyone they think might die before them. Speculation would conclude if that were the case, insureds might be subject to murderous or other catastrophic plots by unscrupulous persons. Therefore, the insurance industry implemented specific criteria defining the kinds of insurable interest that are acceptable.
- Love and Affection is interest that developed through marriage.
- Blood Relationships such as a parent, child or sibling.
- Economic Interests such as key person insurance, i.e., a mortgage company on the life of the mortgagee, an automobile finance company on the life of the auto purchaser, etc.
Who can have insurable interest and when must it exist?
Stranger-Originated Life Insurance (STOLI)
STOLI is also called Investor-Originated Life Insurance (IOLI).
Most STOLI sales typically target seniors. These are life insurance arrangements where investors persuade consumers to take out new life insurance policies with the investors named as beneficiary. Investors loan money to the insured to pay the premiums and the insured ultimately assigns ownership of the policy to the investors, who receive the death benefit when the insured dies.
Because the investors are the constructive applicants, owners, and beneficiaries of the policies, and they have no insurable interest in the insureds, many states view STOLI arrangements as fraudulent.
