Insurable Interest in Life Insurance

Insurable interest is the pecuniary interest. The insured must have an insurable interest in the life to be insured for a valid contract.

Insurable interest arises out of the pecuniary relationship that exists between the policy-holder and the life assured so that the former stands to loose by the death of the latter and/or continues to gain by his survival.

If such relationship exists, then the former has insurable interest in the life of the latter.

The loss should be monetary or financial. Mere emotion and expectation do not constitute insurable interest in the life of his friend or father merely because he gets valuable advices from them.

Insurable interest in life insurance may be divided into two categories:

(1) insurable interest in own life, and
(2) insurable interest in other’s life.

The latter can be sub-divided into two classes:

(a) where proof is not required, and
(b) where proof is required.

Again this insurable interest, (b) can be divided into two classes :

(i) insurable interest arising due to business relationship, and
(ii) insurable interest in family relation.

Insurable Interest in Own’s Life

An individual always has an insurable interest in his own life.

Its presence is not required to be proved. Bunyon says, “Every man is presumed to possess an insurable interest in his estate for the loss of his future gains or savings which might be the result of his premature death.”

According to the definition of insurable interest it is also evident that the person will continue to gain financially while he is surviving and will suffer loss if he is dead because he will be unable to earn or protect the property.

The insurable interest in own life is unlimited because the loss to the insured or his dependents cannot be measured in terms of money, and therefore, no limit can be placed to the amount of insurance. that one may take on one’s own life.

Thus, theoretically, a person can take a policy to any unlimited amount of his own’s life; but in practice no insurer will issue a policy for an amount larger than amount seems suitable to the circumstances and means of the applicant.

Generally, it is mentioned that one cannot purchase policy usually more than ten times of his one year’s income. The premium can be paid by third party provided there was no intention to speculation.

If there is possibility of wager contract it would be void.

Insurable Interest in Other’s Life

Life insurance can be effected on the lives of third parties provided the proposer has insurable interest in the third party. There are two types of insurable interest in other’s life.

First where proof is not required and second, where proof is required.

A. Proof not required

There are only two such cases where the presence of insurable interest is legally presumed and therefore need not be proved.

1. Wife has insurable interest in the life of her husband

It is presumed and decided by Reed vs. Royal Exchange (1795) that wife is presumed to have insurable interest in the life of her husband because husband is legally bound to support his wife.

The wife will suffer financially if the husband is dead and will continue to gain if the husband is surviving. Since, the extent of loss or gain cannot be measured in this case, the wife has insurable interest in the husband’s life up to an unlimited extent.

2. Husband has insurable interest in the life of his wife

The insurable interest is presumed to exist here and no proof is required.

It was decided in Griffith vs. Fleming (1909) that the husband has insurable interest in his wife’s life because of domestic services performed by the wife.

If the wife is dead husband has to employ other person to render the domestic services and certain other financial expenditures will involve at her death which are not calculable.

The husband is benefited at the survival of his wife, so it is self-proved that husband has insurable interest in his wife’s life.

Since the monetary loss at her death or monetary gain at his survival cannot be measured, there is unlimited insurable interest in the life of wife.

B. Proof is required

Insurable interest has to be proved in the following cases:

1. Business Relationship

The policy-holder may have insurable interest in the life of assured due to business or contractual relationship. In this case, the amount of insurable corresponds with the amount of risk involved.

Some of such examples are narrated below:

(a) A creditor has in the life of his debtor : The creditor may lose money if the debtor dies before the loan is repaid.

The continuance of debtor’s life is financially meaningful to the creditor because the latter will get all his money repaid at the former’s survival.

The maximum amount of loss to a creditor may be the amount of outstanding loan plus interest thereon and the amount of premium paid. So, the maximum amount of insurable interest is limited to the outstanding loan, plus interest and amount of premium expected to be paid.

The interest is calculated on the estimation of duration of debt to be paid.

The maximum amount of interest does not say about the payment of policy amount, it, merely, determines the chances of speculation.

The full amount of policy is payable irrespective of the payment of loan and interest.

Since it is life insurance, the full policy amount is paid.

(b) A trustee has insurable interest in respect of the interest of which he is trustee because at the survival of the other person the trustee is benefited and at his death he will suffer.

(c) A surety has insurable interest in the life of his principal : If the principal (the debtor) is dead, the surety is responsible for payment of outstanding loan, or obligated amount.

At the survival of principal, he will not suffer this loss. The insurable interest is limited up to the amount of outstanding loan, interest and premium paid.

(d) A partner has insurable interest in life of each partner : At the death of a partner, the partnership will be dissolved and the surviving partner will lose financially.

Even if the firm continues at the death of the partner, the firm has to pay deceased partner’s share to his dependents. This will involve a huge financial loss to the partnership.

Therefore, the firm collectively can purchase insurance policies in the life of each partner of the firm.

Since the firm part of money up to the extent of deceased partner goodwill, capital, share of profit and reserve, the firm has insurable interest up to the extent in each partner.

Similarly all the partners have insurable interest in life of each partner because they will financially suffer at a death.

(e) An employee has in the life of a key-man : A key-man is the person whose presence, capital , capacity cause profit to he business. If the key-man is dead, the business will reduce profit up to a certain extent.

The business suffers reduced profit, expenses involved in appointing and training new persons and the amount to be given to the dependents of key-man at his death. So the business has insurance interest up to such extent in the key-man’s life.

(f) An insurer has in the life of assured : The insurer suffers at the death of life assured and, therefore, he can get reinsurance of the assured persons by him. The insurable interest is limited up to the policy amount.

2. Family Relationship

The insurable interest may arise due to family relationship if pecuniary interest exists between the policy-holders and life assured because mere relationships or ties of blood and of affection does not constitute insurable interest, the proposer must have a reasonable expectation of financial benefit from the continuance of the life of the person to be insured or of financial loss from his death.

The interest must be based on value and not on mere sentiments. Similarly, mere moral obligation is not sufficient to warrant existence of insurable interest although legal obligation to get support will form insurable interest of the person who is supported in life of the person who is supporting.

Thus, a son can insure his father’s life only he is dependent on him and the father can take insurance policy on his son’s life only when he is dependent on his son.