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An insurable interest is that if someone would suffer a loss if either an object or even a person is damaged or destroyed, or in the case of a person death or disability. The insurance company will require people to have an insurable interest before they will issue a policy. The reason for this is there needs to be a confirmation that the person the policy is being issued to will suffer a loss should something happen to either the person or the object should it destroyed, injured, etc…

An easy example would be the case of your neighbor and the neighbor’s car. You wouldn’t be able to insure your neighbor’s car since if their car were to be totaled in an accident you don’t stand to suffer any financial loss from this situation.

Moral Hazards

In the past the insurance industry did not have as strict of requirements as they do now. The insurable interest policy prerequisite, in fact, simply did not exist. With this being the case it obviously created some quite complicated situations in the past.

Just as there are financial speculators that will speculate on anything from foreign currency to stocks, etc… there were people that would purchase policies as speculation as well. They were gambling on either someone losing their life of that something would happen to an object.

One of the most egregious of them all was that there were people that would take out life insurance policies on people unrelated to them. There are even reported cases that when the individual the life insurance policy was taken out on failed to die in the timely fashion the policyholder wanted, they were “helped along” a little.

It was this type of instance that sparked the insurance industry to change their standards requiring people to hold an insurable interest leading to everything across the insurance industry from just life insurance to also include property. When someone is forced to hold an insurable interest this helps to eliminate the potential for moral hazards.

Property Insurance

When it comes to property insurance being able to find the insurable interest requirement is a very simple link to establish. With a house, car, business or any other type of property being insured should be damaged, destroyed or otherwise rendered unusable that person will experience a financial loss since the property is either going to have to go through repairs or total replacement.  There can be other indirect losses due to the initial loss as well.

A lender is also going to have an insurable interest in your property. For example, as part of a standard mortgage loan the bank is going to require you to purchase and maintain a home insurance policy with the proper coverage limits. This is going to ensure the lender that should the home get destroyed or severely damaged the bank will be able to make their claim that they will be able to collect the balance due on the loaned amount.

Life Insurance

With the discussed property damage, simple; however, when issuing insurance on people it can make things a little more complicated. When it comes to life insurance policies they can be and most often are taken out on the behalf of a dependent. The assumption with this is that the loss a parent would suffer financially should they lose their child and have to pay for burial expenses, etc…

On the other hand, a parent could also take out a life insurance policy on their dependent by claiming that the loss of their child would render them not only financial damage but emotional damage as well. The same goes for life insurance on spouses and isn’t uncommon to take out a life insurance policy on the spouse as well.

With this in mind, people are not going to have an insurable interest on every single relative that they have. A nephew wouldn’t be able to take out a life insurance policy on his aunt; however, should the aunt so choose she could opt to put the nephews name on the life insurance policy as a beneficiary.

Final Thoughts

If you have a person, property or anything else that you deem as an insurable interest speak with an insurance agent about a policy and they will lead you in the right direction. If you have a direct financial link to the continued sustainability of something you likely do hold an insurable interest and most likely will be able to purchase a policy.