Almost all of us have insurance in one form or the other. When our insurer gives us the policy document, generally, all that we do is glance over the decorated words in the policy and pile it up with the other bunch of financial papers on our desk, almirah and forget about it, right? If we spend thousands of rupees each year on insurance, don’t you think that we should know all about it? Our insurance advisor is always there for us to help and make us understand the tricky terms in the insurance forms, but we should also know for ourselves what our contract says. In this article, an attempt is made to make reading our insurance contract easy, so that we understand one of the basic principles, Insurable Interest and how it is put to use in daily life.
What is Insurable Interest?
One has an insurable interest in something if he/she would suffer some kind of loss if that person or property were to be lost or damaged. Furthermore, he/she would benefit financially from that person or property’s continued existence. For this reason, it would make sense for one to purchase insurance on it, so one can continue to receive those.
Insurable Interest in Life Insurance
When Does Insurable Interest Exist in a Life Insurance Policy?
In order to effect, a life insurance contract, it is necessary that the person, who is privy to the contract, should have an insurable interest in the life of the person, for whom the policy is being taken. Although it is difficult to lay down in a precise manner as to what would constitute an insurable interest in a life insurance contract, yet it is a well-settled principle of law that there has to be an insurable interest attached to a life insurance contract. In England, insurable interest is mandated by the Life Assurance Act, 1774 while in America and in India; it is required as a matter of public policy.
The Insurance Act, 1938 of India does not contain any provision which explains the concept of insurable interest. In the absence of any statutory explanation, courts take recourse to the English and American decisions which are in conformity with the prevailing currents of social, economic and religious thought in the society. Thus, in India too, apart from husband, wife or any other close relative, any person, who has a legal right to derive maintenance from a person, can take a life insurance policy on the life of the latter without any proof of insurable interest.
Every man is presumed to have an interest in his own life and he is not required to show at any point that he had some particular interest in the continuation of his life. As regard spouses are concerned, it is generally believed and accepted that a wife has an insurable interest in the life of her husband and vice versa.
As far as children are concerned a parent has no insurable interest in the life of his child as mere love and affection is not sufficient to constitute insurable interest. Similarly, a child does not have an insurable interest in the life of his parent provided he is not dependent on the latter. Therefore, under law, insurable interest is limited to statutory insurable interest.
Another set of relations which acquire insurable interest for effecting life insurance, are relations which originate from contractual transactions. Therefore, a creditor has an insurable interest in the life of the debtor to the extent of his interest and where the debt has been guaranteed by a surety, then on the life of the surety too. Another set of relations which acquire insurable interest for effecting life insurance, are relations which originate from contractual transactions. Therefore, a creditor has an insurable interest in the life of the debtor to the extent of his interest and where the debt has been guaranteed by a surety, then on the life of the surety too.
Business relationships create an insurable interest if one has a financial dependency on the existence of the insured.
For example, say Mr. Ramesh start a business and hire Mr. Phillip to run it. In this case, Mr. Ramesh would have an insurable interest in the life of Mr. Phillip, because if he were to pass away Mr. Ramesh would experience a loss of profits for his business. This is known as business life insurance and is a common practice. Often, corporations take out key man life insurance on their officers, while business partners can purchase life insurance contracts on each other.
In a nutshell, Insurable interest exists in the following cases.
- On One’s Own Self
- Spouses (Husbands and wives)
- Children (including adoption)
- Grandparents and grandchildren
- Creditor on Debtor/Surety
- Business Partners on each other
- Employer on his Employee/s
How to Prove Insurable Interest
In life insurance, proof of insurable interest is required during the application and purchase of a policy. Life insurance is a tool used to make oneself whole again following the financial loss of someone. In theory, some people would be tempted to purchase a life insurance policy on a random person to receive profits if that person were to die. This is why the principle of insurable interest was created to ensure that life insurance will be used properly.
Insurable interest is a non-negotiable aspect of life insurance policies and without an insurable interest, the policy can be void or denied. It is also the duty of the policy owner to prove that they have an insurable interest in the insured party. Proof must be presented at application along with at the end of the policy when the insured has passed away.
To confirm that an insurable interest is present, a life insurance company will usually talk to the policy owner, beneficiary and insured. They will investigate the relationship to the proposed insured and evaluate if there is an insurable interest. If an insurable interest is not found, the policy would be denied at the application or the death benefit would not be paid out.
When Does Insurable Interest Not Exist?
Insurable interest generally would not exist in the following scenarios unless there is proof of financial dependence:
- Aunts and uncles
- Brothers and Sisters
- Nieces and nephews
- Stepchildren and stepparents
To prevent gambling insurable interest is necessary. If insurable interest is not required, the contract would be a gambling contract and would be against the public interest. As long as one can demonstrate and prove that he/she has an insurable interest in the other person, then one would be able to purchase a life insurance policy on them. This would require that one demonstrate that the loss of that person would impose financial hardships on him/her or their child.
About the Author
Mr. Paramesh Kumar S has a diversified work experience of 27 years. He has worked with McMillan Press as an Editor for 2 Years, 22 Years in various Capacities in leading Insurance Companies including LIC, HDFC, Reliance, Exide Life. He was heading South India for the Training needs of Apps Daily, mobile App. The company, before joining Manipal.
Currently, he is associated with MABFSI since November’16 as Assistant Professor with Life Insurance vertical.