Can You Get an Insurance Policy on Anyone?

Insurance policies offer financial protection against unforeseen events. While the concept of insurance is straightforward, obtaining a policy on just “anyone” is subject to specific legal and financial principles. These principles ensure insurance mitigates legitimate risks, rather than facilitating speculative or harmful activities.

Understanding Insurable Interest

A fundamental concept in insurance is “insurable interest,” meaning a person or entity must have a legitimate financial or emotional stake in the insured person or property. This requirement prevents insurance from becoming a mere wager or a means to profit from a loss. Without insurable interest, an insurance contract could incentivize harmful acts, a concept known as moral hazard. For instance, if someone could insure a random stranger, they might be tempted to cause harm to that individual to collect the payout.

In life insurance, insurable interest means the policyholder would suffer a financial or emotional loss upon the death of the insured. This loss could be due to direct financial dependency, shared liabilities, or covering funeral expenses. For property and casualty insurance, insurable interest is tied to ownership, possession, or a direct financial stake in the property itself. This ensures that the policyholder would incur a financial loss if the property were damaged, destroyed, or stolen. Examples of what does not constitute insurable interest include insuring a public figure with no direct financial connection or property one does not own or have a financial stake in.

Common Relationships for Insurable Interest

Many relationships satisfy the insurable interest requirement, particularly in life insurance. Spouses have an inherent insurable interest in each other due to shared financial responsibilities and potential emotional and financial loss upon the other’s death. Parents usually have an insurable interest in their children, and adult children may have an insurable interest in their parents, especially with financial dependency or shared obligation.

Beyond immediate family, business relationships also establish insurable interest. Business partners commonly insure each other to protect against financial disruption that would occur if a partner passes away. A company may also insure a key employee whose death would significantly impact operations or revenue. Creditor-debtor relationships also demonstrate insurable interest, where a creditor can insure a debtor’s life up to the amount of the outstanding loan. For property and casualty insurance, ownership is the most common basis, but a significant financial stake, such as a mortgage lender’s, or a renter’s interest in personal belongings, also establishes insurable interest.

Timing of Insurable Interest

The timing of insurable interest differs between life insurance and property/casualty insurance. For life insurance, insurable interest must exist when the policy is taken out, meaning at its inception. This ensures a legitimate reason for obtaining the policy. Interestingly, for life insurance, insurable interest typically does not need to exist at the time of the claim. For example, if a divorce occurs after a life insurance policy was validly issued to a spouse, the ex-spouse may still be able to receive the death benefit if insurable interest existed when the policy was initially purchased.

In contrast, for property and casualty insurance, insurable interest must exist at two distinct times: both at the time the policy is purchased and at the time of the loss. This dual requirement ensures the policyholder consistently has a financial stake in the insured property. If a policyholder sells a property, their insurable interest ceases, and they can no longer claim a loss if the property is subsequently damaged.

Implications of No Insurable Interest

If an insurance policy is issued without valid insurable interest, it is considered void from its inception. This legal principle, “void ab initio,” means the policy was never legally valid and essentially never existed. Consequently, any premiums paid for such a policy might be returned. More importantly, any claims made under a policy lacking insurable interest will be denied.

This requirement prevents insurance from being used for gambling or speculative ventures on human lives or property. The absence of insurable interest undermines the integrity of the insurance system and can lead to severe consequences, including legal disputes and potential charges of insurance fraud for those who knowingly attempt to obtain such policies.