What is insurable interest?

Insurable interest is when you have a financial stake in (or directly benefit from) the existence of an object or individual and would experience hardship if anything were to happen to it. For example, you have an insurable interest in your car because you would suffer a loss if it is damaged or destroyed.

Key Things to Know About Insurable Interest

• Insurable interest forms the basis for all types of insurance policies – without insurable interest, you wouldn’t have a need to insure something.
• If you rely on someone or something financially, or if you would stand to lose money if the person or object were to disappear, then you likely have an insurable interest.
• Insurable interest can help prevent moral hazards in insurance. If you would gain, either financially or otherwise, from the destruction or death of the insured object or individual, you do not have a true insurable interest.

Insurable Interest in Car Insurance

Insurable interest in car insurance is typically proved by having a vehicle in your own name. If your name is on the title, it is clear that you would suffer some sort of loss, financial or otherwise, if the vehicle were to be damaged, totaled, or stolen.

If your name is not on the title, proving insurable interest can be a little more difficult. You’d need to prove that you stand to lose money if something happened to the vehicle or that you handle the vehicle’s finances for a dependent or relative.

For example, if the car is in a relative’s name, but you take care of that relative financially, you may be able to prove that you have a reason to insure the car yourself. You may also be able to show insurable interest if you use someone else’s car regularly, like if you use their car every day to commute to work.

Insurable Interest in Life Insurance

Life insurance is the most common situation where insurable interest is talked about because the laws surrounding who qualifies are more complicated. In general, you must be immediate family or have a relationship that is recognized by law to have an insurable interest. You cannot take out a life insurance policy for your neighbor or friend because there isn’t a close enough relationship, but you can take out a policy for your spouse, children, or parents.

Companies can also have insurable interest in their employees and executives, like presidents or CEOs, because the loss of those people would result in financial and emotional hardships.

If you are wondering whether you have insurable interest in someone else for the purpose of life insurance, it is best to speak with a licensed life insurance agent to help you go through the options.