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).
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 a newly devised concept of life insurance, stretching the boundaries of insurable interest; therefore, many states have banned such practices.
Most STOLI sales target seniors. Investors persuade potential insureds to take out a life insurance policy and name the investor as beneficiary. In turn, the insured is paid an enticing fee, which could be in the form of an upfront payment, a loan, or a small continuing interest in the policy death benefit. Generally, the investors loan money to the insured to pay the premiums for a defined period (usually two years based on the policy's contestability period). After that period, the investors make the premium payments on behalf of the insured.
1 |
Section 2.2 ReviewThe policyholder always retains the Right of Assignment. |
2 |
Unequal contingencies on the potential for profit or loss upon both parties in an insurance contract is a(n): |
3 |
Agents are prohibited from negotiating insurance contract provisions. |
4 |
A ____________ contract obligates only one party (the insurer) in the contract. |
5 |
Indemnity contracts are also known as reimbursement contracts. |
6 |
STOLI contracts typically target: |
