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FAQ’s & Wealth Building
Although insurance is a broad area and many have the concept of insurance fairly well understood–many lack the understanding of what “insurable interest” is and how it could, or is currently affecting their insurance at this time.
In this discussion TheWealthIncreaser.com will discuss the importance and relevance of the “concept of insurable interest” as it relates to your insurance and the building of wealth.
What is “insurable interest”
Insurable interest is an insurance term that refers to a financial or other benefit that an insured person receives from the continued existence of an insured asset, including life insurance. It’s important to understand insurable interest when purchasing insurance because it helps protect insurers from fraud and puts you in position to receive the coverage that you desire if you or a loved one were to suffer loss from a designated event or transition in the case of life insurance.
Insurers go to great efforts to delay, deny, defend and cause havoc for the insured in many instances as their goal is to pay out the least amount possible when you file a claim, therefore you want to definitely make sure that you have an insurable interest when you purchase life insurance–or any insurance–when applicable.
However, if you were to have an insurable interest and a valid claim, you want to know “proactively” that the insurance that you selected would do its intended purpose. By ensuring that you have an insurable interest you can proceed with confidence on a daily basis knowing that the coverage that you selected will work for your and/or your family’s benefit at a future date.
For property and casualty insurance, insurable interest must exist when the insurance is purchased and when a loss occurs. For life insurance, it only needs to exist when the policy is purchased.
Insurable interest is the legal and financial interest or attachment that you would have for an asset or piece of property that a property and casualty insurance policy or life insurance policy may cover, and it is a requirement if you file a claim and expect to be compensated or reimbursed!
In general, there are three types of risks that are insurable:
1) liability risk Liability risk protects you from the actions of others such as lawsuits against you.
2) personal risk Personal risk protects you in case someone transitions and you are the beneficiary and you will suffer financially from their transition.
3) property risk Property risk is any risk that could cause a partial or total loss of property such as an auto, home or other tangible assets.
Insurable interest refers to an investment that protects anything subject to a financial loss. You or an entity may have an insurable interest in an event, asset, or, action when the loss or damage of the insured asset or person can cause a financial loss.
In order to buy an insurance policy, insurable interest must exist. In the case of a life insurance policy, the owner of the policy must always have an insurable interest in the life of the insured person. If the owner is not the beneficiary, then the beneficiary named in the contract would also need to have an insurable interest.
Insurable interest in simple terms means you or your beneficiary(s) stand to lose financially if a certain event occurs!
Below are some examples of insurable interest and how you can use your understanding to help you or your loved ones prosper in what could be a difficult time:
How can I use my understanding of “insurable interest” to build wealth
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PropertyIf you own a car or home, you have an insurable interest in it because you could suffer financial losses if it’s damaged or items are stolen. If you don’t have a financial interest in the house, there is no insurable interest. You have to have an insurable interest in the asset to insure it. In other words, you can’t buy a home insurance policy on your neighbor’s house or an automobile insurance policy on a stranger’s car. Even if you did, the policy would be unenforceable.
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Life insuranceIf someone has an insurable interest in you, meaning they would benefit financially if you continued to live, you could provide them with an insurable interest annuity often called a life insurance policy so that they could proceed in life from a better financial position. You would know that those who depend on you financially would be able to continue living at a certain level of comfort if you were to transition. If the designated beneficiary(s) had not received the proceeds from the life insurance annuity in the case of your untimely demise–many of the goals that they (or you) desired would possibly be unattainable or made more difficult to achieve.
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Military Survivor Benefit ProgramIf you served in the military or are currently enlisted, you can elect to provide “insurable interest coverage” to a spouse, relative, ex-spouse, or someone you’re engaged to or in a common-law marriage with.
Why having a comprehensive understanding of your insurance needs are so important
Whether it be “insurable interest” or other areas of understanding that you need insurance wise–it is important that you recognize your benefit by comprehending at your highest level or more succinctly in a comprehensive manner.
Insurable interest “helps minimize” moral hazard, which is when someone is incentivized to cause loss or damage to collect on their insurance!
You want to know at the earliest time possible all of the areas of insurance that you need to address at this time and later times (at the various stages of your life) so that you can achieve more while you are here on planet earth.
Even if you now lack the funds to purchase the various insurance coverage that you may need–you want to prepare your mind for the eventuality so that you can increase your income, cut expenses or do a combination of the two, to more efficiently move toward making your dreams come true!
To have an “insurable interest” in a car or boat means you will suffer financial loss if the vehicle or boat is damaged, stolen or totaled. Therefore, you must prove you have a financial stake in the vehicle or boat so that you can be compensated appropriately in the case of an unforeseen event.
How to prove insurable interest
Prior to offering coverage, the insurance company will take steps to verify the fact that you have an insurable interest. However, you want to know the concept and understand who you want to select as beneficiaries where applicable, as they too must have an insurable interest or would suffer financially in many instances.
These steps that insurance companies take may include requesting identification from you and will also likely involve a phone interview at a minimum, where the insurer inquires about relationships and insurable interest of all parties involved.
For life insurance you may be scrutinized in greater detail and have to meet certain policy guidelines according to the guidelines of the insurance company that you engage with or select. Furthermore, many insurers have policy limits, meaning they will limit your “maximum policy limits” based on your income, your net worth or some other metric such as a multiple times your income.
In addition, your selection of life insurance can be used as part of an overall strategy in the planning of your estate after you transition.
Conclusion
By getting out in front of your insurance needs you are showing responsibility for your and your family’s future and the success that you desire will be more likely to occur.
The “lack of insurable interest” in virtually all cases makes an insurance policy unenforceable, and the insurer is not obliged to pay out on any claims. For example, if you were taking out a life insurance policy on a stranger without any legitimate reason–it would be refused if you were to make a claim even if you had been paying premiums for years.
An “interested person” has an “insurable interest” in something when loss of or damage to that thing would cause the person to suffer a financial or other kind of loss.
Normally, insurable interest is established by ownership, possession, or direct relationship!
Always realize that an “interested person” has an insurable interest in something when “loss of or damage” would cause the person to suffer a financial or other kind of loss. Also, your spouse and dependents would generally be considered to have an insurable interest!
They can prove the relationship with a marriage certificate, domestic partnership registration, birth certificate or other legal document that the insurer finds acceptable.
Dependents always have an insurable interest in the person(s) whose income they rely on. In order for an insurance contract to be valid, you as the policyholder must have an insurable interest in the insured–and particularly with life insurance.
The key point of this discussion is that a policy obtained by a person without an insurable interest in the insured cannot be enforced!
Generally, insurable interest is recognized when ownership, possession, or a direct relationship is established and therefore gives you or a designated beneficiary(s) a financial stake in the matter. An insurance policy could be put in place to protect against financial loss if anything were to occur to you or an asset.
For property and casualty insurance, insurable interest must exist when the insurance is purchased and when a loss occurs!
For life insurance, insurable interest only needs to exist when the policy is purchased!
Also if you were involved in a partnership, LLC or corporation–you could possibly insure the life of your partner, member or officer if there is a pecuniary interest–which is an exception to the general rule of insurable interest. By purchasing “key person insurance” on the employee(s) who are key to the success of your business, your company would be in a better position to regroup after the transition of that key employee–and possibly not lose ground to the competition.
In addition, it is generally a good idea to purchase additional liability insurance (umbrella policy) if you are a high earner and/or you have a high net worth.
By contemplating insurance options and making a sincere commitment to achieve more, you can put yourself in position to soar and achieve at a level that allows you to open a new door.
All the best to your “insurable interest” understanding and insurance success…
NOTE: The Publisher of this article is not a licensed attorney or licensed insurance agent but is discussing what has been learned over the years from clients of varying backgrounds. Although all efforts have been taken for accuracy in this discussion–accuracy cannot be guaranteed!
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