United States
Hong KongInsurable interest: who may insure whose life
Insurable interest means the applicant would suffer a genuine loss if the insured died. In life insurance it must exist when the policy is bought and need not exist at the claim. Property insurance is the reverse, which is the comparison the exam uses to test whether you know the rule.
Insurable interest exists to stop insurance becoming a wager on somebody's death. Without it, anyone could buy a policy on a stranger and then have a financial reason to want that stranger dead. That is the whole reason for the doctrine and it explains every detail of how it works.
Who has it
- Everyone in their own life, without limit.
- Close family, where a genuine relationship of financial or emotional dependence exists. Spouses have it in each other; parents in minor children.
- A business in a key employee whose loss would cost it money.
- Business partners in one another, under a buy-sell arrangement.
- A creditor in a debtor, to the extent of the debt.
Note the last one carefully. A creditor's interest is limited to what is owed, not to whatever face amount the creditor would like. That limit is where the doctrine's logic shows itself: insurance is there to make good a loss, and the creditor's loss stops at the debt.
The timing rule
| Life insurance | Property insurance | |
|---|---|---|
| Interest required at inception | Yes | Yes |
| Interest required at the time of loss | No | Yes |
| Why | The contract was valid when made and the insured consented | Indemnity, so there must be an actual loss to indemnify |
That middle row is the examinable line. A divorced spouse who bought a policy while married may keep it and collect on it, because the interest was there when the contract was made. A homeowner who sells the house collects nothing, because there is nothing left to indemnify.
Life insurance is not a contract of indemnity. Nobody can calculate the value of a life, so the contract pays a stated sum agreed in advance. That is why the timing rule is the way it is, and knowing the reason means you never have to memorize which way round it goes.
A woman insures her husband's life. They divorce four years later and she keeps the policy and continues paying the premiums. He dies six years after the divorce. What is the position?
- The insurer pays, because insurable interest existed when the policy was purchased
- The insurer refuses, because insurable interest ended at the divorce
- The insurer pays the cash value only
- The insurer pays only if he consented again after the divorce
Consent, which is separate
Insurable interest is one requirement. The proposed insured's written consent is another, and it is why the insured signs the application even where somebody else owns the policy. A stem that describes a policy taken out on someone who never knew about it is describing a problem with consent, not only with interest.
Stranger-originated life insurance schemes work by manufacturing an apparent insurable interest at inception so that a policy can be transferred to investors afterward. The doctrine's timing rule is the loophole they exploit, which is why the outline lists STOLI and investor-owned life insurance as a separate sub-item under underwriting.
Where it appears
- Section III
- Underwriting, sub-item 1, in a section worth 12 questions
- Section IX
- Contract law heading, sub-item 2, in a section worth 8
- Related sub-item
- STOLI and investor-owned life insurance
- Business context
- Key person and buy-sell, in section IV
The opinion, and the concession
Insurable interest is a five-minute topic that candidates get wrong because they meet the property insurance version first, in general knowledge or in a combined course, and the two rules point in opposite directions. If you are also studying property and casualty, learn the two side by side and label them. If you are not, you can simply learn the life rule and ignore the comparison, and you will be faster for it.
The concession: exactly which relationships create insurable interest by law, rather than by underwriting practice, is a matter of Texas statute and case law that varies at the margins. The Insurance Code addresses it in places and we hold the Code, but the doctrine's edges have been drawn by courts. The exam tests the core cases, and the core cases are not controversial.
Common questions
When must insurable interest exist in a life policy?
At the time the policy is purchased. It does not have to continue, so a policy bought by a spouse remains valid and collectible after a divorce. Property insurance is the opposite, requiring insurable interest at the time of loss because it is a contract of indemnity.
Does a creditor have insurable interest in a debtor?
Yes, to the extent of the debt. The limit matters: a creditor cannot insure a debtor for an arbitrary sum, because the loss the insurance answers is the unpaid debt. That ceiling is the clearest illustration of what the doctrine is for.
Can you insure a stranger's life?
No. There is no insurable interest and, separately, no consent. Both requirements exist to stop insurance becoming a wager on somebody's death, and schemes that manufacture an apparent interest so a policy can be sold on to investors are what the outline's STOLI sub-item is about.
Do you have insurable interest in your own life?
Yes, without limit, which is why an individual can buy any amount of coverage on themselves subject only to underwriting. The interesting questions all arise where somebody else is the applicant and owner, because that is where the doctrine has work to do.