Courts and state laws have established guidelines for those persons and entities presumed to have insurable interest. They fall into three general categories – relations by blood or marriage, business relationships, and creditors.
Blood or Marriage:
People generally have an insurable interest in the lives of their spouses and dependents. Based on this relationship, the general rule of thumb is:
- Husbands and wives
- Parents and children (including adopted children)
- Grandparents and grandchildren
- Brothers and sisters
- Engaged couples (some states)
No Insurable Interest:
- Other relatives by marriage
- Nieces and nephews
- Uncles and aunts
- Stepchildren and stepparents
An insurable interest may be created in an otherwise non-insurable interest relationship by the creation of a financial dependency or a business relationship between the parties. For example, an uncle may be deemed to have an insurable interest in a nephew because the uncle’s business is run by the nephew and the business, as run by the nephew, is making a lot of money for the uncle.
One who receives economic benefit from the continued life and good health of another has an insurable interest in that person’s life. For example, employers can take out key person life insurance on key employees, corporations can take out insurance on the lives of their officers, and business partners can take out life insurance on each other.
Creditors are allowed to take out life insurance on the lives of their debtors, with the debtors’ consent, up to the limit on the debt. Mortgage and credit insurance are examples of this type of insurance.
Insurance companies have a duty to exercise reasonable care in determining whether insurable interest exists and whether the consent of the insured has been obtained. If they don’t, they may be sued.