Determination of insurable interest

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:
Insurable InterestHusbands and wivesParents and children(including adopted children)Grandparents and grandchildrenBrothers and sistersEngaged couples (some states)
No Insurable InterestOther relatives by marriageNieces and nephews CousinsUncles and auntsStepchildren and stepparents
Business Relationship: 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, business partners can take out life insurance on each other.
Creditors: 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.
For more information on life insurance contracts, read our section on Life Insurance.

The Insurable Interest in a Life Insurance Policy

To stop your good neighbor Sam from taking out a life insurance policy on you and then killing you to get the life insurance money, your neighbor, as the purchaser of the insurance policy, must have an insurable interest in the life of you, the person being insured at the time of application. In dealing with life insurance, a person is deemed to have insurable interest when the purchaser has a reasonable expectation of profit or benefit from the continued life of the insured.
Every state requires that an insurable interest exist at the time of application. Policies issued on lives where there is no insurable interest are regarded as void from the beginning because they are against public policy. They are against public policy because they encourage murder for profit. If there was no insurable interest requirement, some people would be tempted to purchase life insurance policies to collect the death benefit by killing the insured.
A person is always considered to have an unlimited insurable interest in his own life and health. Therefore, the beneficiaries of the policies that an insured purchases on his own life do not need to have an insurable interest. It is presumed that the insured would name as a beneficiary only people who want the insured to live a long and healthy life. A person, therefore, can obtain as much insurance as he wishes on himself – subject to other limits an insurance company might have. For example, insurance companies commonly limit the amount of insurance they will place on a person to that appropriate to his income and life style.

Check for premium included in application

Check for premium included in application
When you attach a check to your application for health, life or disability income insurance, the insurance company may accept or decline your offer.
Nor surprisingly, this also depends on the application’s wording. For example, the insurance company application, by its terms, may state that your offer is not accepted (even though you have included the check for the first premium) until the application is approved by the company’s underwriters. In this situation, if you incur a claim before the underwriting is completed, the insurance company has every right to decline and return your premium.
Alternatively, the insurance company can unconditionally accept both your application and your premium. When they do this, they have formally accepted your offer and a legal contract of insurance is formed.
Or the insurance company may reject your offer and end negotiations.
Or the insurance company may reject your offer by making a counter-offer. A counter-offer is a new set of terms and conditions given in response to your original offer. The difference between the original offer and the counter-offer may be an increase in premium, for a health insurance policy the addition of a rider excluding coverage for treatment for certain health conditions, or for a disability income policy a change in the terms of coverage, such as offering to issue for a reduced monthly benefit from that for which you applied. If you do not accept the new terms, there is no contract of insurance.
Check not included in application
If you do not attach a premium check to your insurance application, you are inviting the insurance company to make an offer to you. The insurance company may end the negotiations or may make an offer of insurance. You accept when you receive delivery of the policy and pay the first premium.
Whether an offer or a counteroffer is made, the second component—acceptance—must occur by you as the prospective policyholder.
If you have included the first premium with your application and you are otherwise insurable on the date of your application, you ordinarily have the right to expect to have coverage from the date of application even if you are injured or killed while the insurance company is deciding whether to accept your offer. In this case, you are generally protected by the terms of the premium receipt given to you at the time you completed the application.
The technicalities of offer and acceptance, often controlled by the precise wording of your application and the premium receipt can be tricky. If you have an issue with an insurance company, you should contact an attorney for guidance.