Insurable Interest

What is insurable interest?

In order to purchase life insurance on another person, you must prove insurable interest.  Additionally, it is also required in property insurance.  To purchase property insurance you must prove to the insurance company (insurer) that you have an insurable interest in the property being insured.

At what time is the applicant required to prove insurable interest?

It depends on what line of insurance they ask you about on your insurance licensing exam.  If they are asking about life insurance, you mustinsurable interest is required before you can purchase fire insurance on a home. prove it at the time of application.  Remember though, purchasing life insurance on someone else isn’t done in secret.  Why?  Well, if you are buying life insurance on someone else, the insurer is going to be underwriting that other person as a risk.  In other words, how likely are they to die?  So, the insurer will probably require them to take a physical exam.  They will also have to sign the application.  Why?  They are the insured, or person covered by the insurance.  Once proven in life insurance, it will never need to be proven again.  In life insurance, it must be proven at the time of application, and never again.  So, it is not required to be proven at the time of death.

Well, that’s all true about life insurance, but what about Property insurance?

In Property insurance, insurable interest must be proven at BOTH the time of application AND the time of loss.  You must have an economic interest in the property when you purchase the policy, and at the time of loss.  If you no longer have an insurable interest at the time of loss, you cannot collect on the claim.  On the insurance licensing exam, they primarily focus on the requirement to prove it at the time of loss for property insurance, since it is different than the requirement applied to life insurance.

For life insurance, who would I most likely have an insurable interest in?

In order to prove you have an insurable interest in another life, you have to prove you will benefit from their continued life.  It is generally said you have insurable interest upon another if they are immediate family (your kin), related by blood or there is some type of economic interest (such as a business partner).

For property insurance, what is the purpose of the insurable interest requirement?

Insurance is NOT for profit.  So, to prevent people from profiting from insurance, the insurance companies created the insurable interest requirement.    The purpose of insurance is to restore the insured (person covered) to the financial position they enjoyed prior to the loss.  Can you purchase fire insurance that covers your neighbor’s house?  No.  Why?  You don’t have an insurable interest.  You don’t have a financial interest in their property.  Believe it or not, this concept has been on the insurance licensing exam in question form.  It goes something like this:

J would like to purchase property insurance covering his neighbor’s house. The insurance agent would be unable to write this policy since they inform J he lacks:

A.  Indemnity
B.  Custodial care
C.  Insurable interest
D.  Coinsurance

Answer:  D
Explanation:  Since J has no ownership interest in their neighbor’s property, they would be unable to purchase property insurance since they would be unable to prove insurable interest if there was a loss.

What else can help me prepare to pass my insurance licensing exam on my first attempt?

Other tips to help you pass your insurance licensing exam on your first attempt:

Insurance Exam Test Taking Tips

Also, check out our definition and question of the day videos on our YouTube channel:

PassMasters Insurance Exam Prep YouTube Channel