What Does Insurable Interest Mean?

Lynda Taylor is an assistant director of Risk Product Development at Northwestern Mutual.

There’s a reason life insurance is such an important part of financial planning. Your policy’s death benefit can help support your loved ones if the unthinkable were to happen. And if you rely on someone else financially, being a beneficiary on their policy could be just as valuable. That’s what life insurance is for—and that’s exactly why you must have a financial interest (or, as we call it, an insurable one) with any person or business that you get insurance on—or that gets it on you.

What is insurable interest?

Having an insurable interest means that you, your family or a business would experience financial hardship if someone passed away. This is something you’ll need to prove if you’re hoping to take out a life insurance policy on another person. Typically, members of the same family, business partners or people who have a financial relationship will be able to prove an insurable interest.

By the way, the idea of insurable interest also applies to other types of coverage. If you own a home and are seeking homeowners insurance, for example, you have an insurable interest because you’d suffer financially if your property were damaged. Similarly, a professional musician might have an insurable interest in their instruments.

Is insurable interest required for life insurance?

Insurable interest is required to take out a life insurance policy on someone else. Insurance is meant to help protect people from financial loss. Allowing someone to take out a policy that would pay out—even if the beneficiary had no financial loss—isn't how insurance is designed to work. And allowing this could invite fraud. In the insurance world the goal is to prevent what’s called a “moral hazard.” This might happen if a policyholder is incentivized to cause a loss that would result in a payday from an insurance company.

But if you purchase a life insurance policy insuring yourself, then you can choose whoever you want to be the beneficiary. In this case, the beneficiary does not need to have an insurable interest in the policyholder. The policyholder can also choose multiple beneficiaries and specify how they’d like the death benefit to be split among them. Some people even give their life insurance proceeds to a charity

Who has insurable interest in life insurance?

So, what counts as insurable interest in life insurance? You’ll likely tick off the right boxes if you’re seeking a life insurance policy for:

• Yourself: As the policyholder, you have a built-in insurable interest.
• Your current or ex-spouse: If you’re married, you would probably suffer financially if your spouse died (and vice versa). You may also have an insurable interest in an ex-spouse who provides alimony or child support.
• Your children: Losing a child is painful enough, but medical bills and final expenses can also cause financial stress for parents.
• Your business partner(s): The death of a business partner could have major financial repercussions, especially if it would disrupt funding or make it difficult to continue operating.
• Someone you’ve loaned money to: If you’ve made a substantial loan to someone, and that person passes away, their repayments will stop. This could cause a financial hardship.
• Someone who’s named on a loan with you: Let’s say you’ve co-signed on a loan for someone who dies unexpectedly. Their outstanding balance will become your responsibility—and in some cases, it could be due immediately. As the borrower, you may also have an insurable interest in the person who co-signed for you.

You have a lot of options with life insurance. Your time frame, financial situation and legacy goals are all important factors. Your Northwestern Mutual financial advisor can be a great resource, providing personalized financial guidance when you need it.