- Insurable interest is the key logic driving life insurance contracts
- Insurable interest is based on the relationship between the insured and the beneficiary
- Only when there is an insurable interest between the insured and the beneficiary, can life insurance be availed
When 28-year-old Ramit Arora recently bought a pure term life insurance policy for himself, he listed his wife as the nominee. At the same time, he wanted to take another life cover for his best friend Ajay Khanna, and wanted to assign himself as the nominee.
"I took a Term Insurance Plan because of its attractive features and benefits and wanted the same plan for Ajay. However, my insurer informed me that I couldn't take a policy for my friend as I had no insurable interest in him," says Ramit.
DID YOU KNOW? You can have insurable interest in your assets such as a home, a vehicle, or a piece of art. The covered amount is usually the market value of the property or object in question.
What is Insurable Interest?
Insurable interest is the key logic driving life insurance contracts. It is a term used to define the relationship between the insured and the beneficiary (nominee). It exists when the beneficiary derives any financial benefit from the continuous existence of the insured, and consequently suffers a financial loss in case of his/her demise.
In the above case, Ramit was denied insurance for his friend because he does not derive any financial benefit from his friend’s existence.
Why Insurable Interest?
Life insurance is a contract between the insurer and the insured based on trust and faith. If there’s no insurable interest, anyone would have been able to insure and get the pay-out on anybody else’s demise. Such a scenario could have tragic consequences, leading to frauds.
Who Can Have Insurable Interest?
- Your Blood Relations and Dependents
Your parents, spouse, children, and others, who depend on you financially, have an insurable interest. In your absence, they will be exposed to financial risk. The pay-outs received from your life insurance policy will help them address various expenses, needs, and square off liabilities.
If Ramit was a dependent or a close blood-relative of Ajay, then he would have been able to prove insurable interest in Ajay, and avail a plan on the latter.
- Your Employer
Yes, your employer too can have an insurable interest in you. If you are a key employee whose loss would cost the company, it can avail a life insurance for you. Known as ‘key person insurance’, your employer pays the premium, and in the unfortunate event of your demise, the employer receives the sum assured. The life insurance proceeds received are used by your employer for covering financial losses arising from your absence.
- Your Creditor
Your creditor can also opt for a life insurance cover on your life (with your consent). However, the sum assured can't be more than the debt amount.
Insurable Interest in the Best Interest of the Insured and Insurer
Death of the family’s chief breadwinner puts immense financial burden on his/her dependents. One of the basic objectives of life insurance is to provide a financial safety net to your dependents in case of your untimely demise.
Insurable interest ensures no one takes undue advantage of your policy, thereby curbing fraud, and makes sure your dependents are not denied of the sum assured and other benefits of the policy. It works in the best interest of the insured and the insurer.
Exide Life Insurance offers a gamut of life insurance policies that help your family address crucial financial needs in your absence. Learn more about our offerings here.
