It is a general principle of insurance law that where the terms and conditions of an insurance contract are free from objection, the most important factor in determining whether a policy is enforceable will be ascertained by construing and interpreting the document in accordance with the express and implied intentions of the parties. One such issue arises in connection with insurable interest. The principle of insurable interest was developed to protect people who are insured by ensuring that they would suffer losses if there were no insurance cover or insufficient insurance.

This article is about when the life insurance contract is valid, not whether it’s a good idea to get life insurance.

When must insurable interest exist for a life insurance contract to be valid?

The short answer is that there must be insurable interest between the insured and the beneficiary of the policy in order for a valid contract to exist. An individual is considered to have an insurable interest in his or her own life, and that of his or her spouse.

However, if the insured is co-owner with another person not under common control then the contract would not be valid even though there is an insurable interest.

An example would be for two married people who are business partners own separate homes. In this type of situation, there could not exist an insurable interest between the two business partners because they are under common control.

In most states, it is possible for a person with an insurable interest to take out life insurance on another so long as the term of the policy is 30 years or less unless a court finds that a longer term is appropriate.

An insurable interest exists when the person taking out insurance will suffer a financial loss if the insured dies or becomes disabled. An insured can include himself, herself, and his or her spouse, but not all relatives are automatically considered to have an insurable interest in one another’s lives. The exception would be stepchildren.

An insurable interest can be held by a person living with him or herself. It is possible to take out life insurance on oneself if alive, though the premiums will be much higher than for someone else based on actuarial tables.

The law allows for an insurable interest when the insured is another shareholder in a closely-held corporation.

Under these circumstances, the shareholder could take out insurance on the other shareholder. It would also be possible to take out life insurance on one’s child even if they are not living under one’s own roof provided he or she was otherwise related to them. If this is done, it should be because there is an insurable interest between the child and the person taking out the insurance on that child.

Insurable interest comes from two Latin words, “in” meaning “to” and “suscipere” which means “to assume the risk.” In the context of life insurance, an insurable interest exists when a person could suffer a loss if the insured died. This is usually defined as a person whose financial security would be compromised by a person’s death

Insurable interest demands that a party must have an interest in the continued life of another, be it financial or otherwise. This is necessary so that there can be no suspicion of fraud in policy issuance. There are two kinds of interests- beneficial and legal. Beneficial interests means direct benefit, while legal simply means that the person stands to lose something if the insured dies. There must also be a possibility of loss in either case.

Insurable interest is viewed as a risk sharing mechanism and it becomes ineffective when one cannot suffer any financial or personal loss due to death of an individual. This is usually determined based on the relationship between the parties involved and the amount of the benefit.

The contract for insurance becomes invalid if any party lacks insurable interest at the time of formation of contract. This is because there cannot be a true consent from both parties without insurable interest, which is an important element of a valid contract under common law. In case this element is present only at the time of execution of contract but not at the time of formation, then it can be assuaged by proof that this party was unaware of the lack of insurable interest.

However, if the insurable interest exists only at the time of execution and not at the time of formation then it would be void ab initio or simply invalid. It should be noted that just because one party lacks insurable interest during policy issuance, the contract is not automatically void. If a person purchases life insurance for another with whom he has an insurable interest, the contract is still valid even if the person later ceased to have such relationship with that individual.

Insurable interests in family members:

The law recognizes that a person has an insurable interest in the life of his or her spouse and children. It can also be said that a person may acquire an insurable interest in the life of a relative or an acquaintance through contract if that person pays consideration for the policy.

In some jurisdictions, courts have held that a mother has an insurable interest in her unborn fetus. And, according to another jurisdiction which follows the majority rule, a father may also have such an insurable interest in his unborn child if the father pays the premiums. A minority of jurisdictions hold that a father cannot have an insurable interest in his unborn child and, thus, is not financially liable for prenatal expenses if he does pay the premiums on the grounds that it would be against public policy to bind him through contract or tort liability.

This can also be extended even to cases where a party has an insurable interest in another for a time after the policy was first issued. If a person purchases life insurance on his or her spouse and later divorces, he or she still has an insurable interest during the marriage even though it will cease upon divorce. This is because there is no technical termination by the divorce; relations between the parties merely change.

If the insured is a minor, then an adult has to have an insurable interest in order to purchase life insurance on him. This is because of the law that no person can bind a minor until he or she reaches majority and assumes control of his or her actions. However, just because one does not have insurable interest at the time of a minor’s birth does not mean that he or she could never have such an interest in the future. In Florida, for example, it has been held that when a parent contracts to pay premiums on his child to age 18, he will have insurable interest during this period even if it is subsequently reduced to 16 years due to a change of circumstances.

Insurable interest of an unborn child:

It is possible that the insurable interest could exist even before birth or during childbirth where necessary to save the life of an insured person. In these cases, if the policy is later assigned away from the spouse to another, it may be formed by new consideration at that time.

In some jurisdictions, a person may have no insurable interest in someone he or she is merely engaged to marry. In other words, it would be impossible for a fiancé to purchase life insurance on his or her soon-to-be spouse because there is no consideration changing hands upon marriage. This has been attributed to the fact that the marriage contract contains coverage for the events of death.

However, insurable interest can exist between engaged people in some jurisdictions where consideration is paid for an insurance policy on a specific event occurring during the engagement period, such as if they are planning to marry but are not yet married. It has also been held that an insurable interest exists where a person who lives with his or her fiancé as man and wife has provided financial support to the other person.

In California, for example, if an insured is engaged as well as cohabitating with another as husband and wife, he will have insurable interest in the other’s life so long as there is no marriage between them.

For instance, if the insured and another person (the proposed insured) live as husband and wife and make a joint decision to purchase insurance on one another’s lives, then there is an insurable interest between them even though they are not legally married.

In some jurisdictions, an insurable interest has been found where the intended beneficiaries of a life insurance policy would be the insured’s children from a prior relationship. In Florida, for example, it has been held that where the intended beneficiary of a life insurance policy is not necessarily the spouse or child of the insured but rather some other person with an existing parent-child relationship to the insured, there can still exist an insurable interest so long as there is an intention to secure the interest in the beneficiary.

Insurable interest in a business partner:

An insurable interest can exist between partners in a business when they are both under common control. This is because it would be impossible for one partner to take out insurance on himself or herself when he or she has no separate identity apart from the business. The typical example of this would be if a husband and wife owned an incorporated grocery store. If one dies, then the other can take out life insurance on his or her life because there is insurable interest between them under common control.

However, if each partner worked in his or her own right for another company and had separated insurable interests, then the fact that each partner had an insurable interest in the other’s life would have no effect.

Insurable interest between co-owners of property:

It is possible to have insurable interest for a person who owns property with another if they are otherwise unrelated. For example, if one purchases a house next door to another person who is not related, they may each take out life insurance on the others’ lives.

However, it would not be possible to have insurable interest if the parties are otherwise related. For instance, if someone purchases a house next door to his brother or sister then there could not exist an insurable interest between them because he or she is already related to them.

The same would be true if the parties were business partners, even if they are under common control. For example, if two business partners own their respective homes next door to one another, then there could not exist an insurable interest between them because they are both under common control.

However, it would not be impossible for one partner to take out life insurance on the others’ life if there were an insurable interest between them.

Insurable interest and parents:

An insurable interest between parents and their children exists when the parent secures a policy with themselves as beneficiary because, in this case, it is possible for the parent to suffer a financial loss if the child dies. Thus, an insurable interest exists only when the parent is capable of suffering a loss upon the death of his or her child, and cannot exist between parents and their stepchildren.

Insurable interest in one’s self:

An insurable interest can be held by a person who lives with himself or herself. For instance, it is possible to take out life insurance on oneself if alive, though the premiums will be much higher than for someone else based on actuarial tables. It would also be possible to take out life insurance on one’s child even if they are not living under one’s own roof provided he or she was otherwise related to them.

Insurable interest in one’s own business:

An insurable interest between individuals can exist when they are both under common control, even if they are not related otherwise. For example, it is possible for two partners who run a business together to have an insurable interest because there is common control between them.

Insurable interest between a company and its shareholders:

Insurable interest may exist when the shareholder is the only person entitled to receive benefits from a corporation. In such cases it would be possible for an insurable interest to exist as well as receiving the benefit since he or she could suffer a financial loss upon death.”