What is an insurable interest in life insurance?


In  Meaning of Life Insurance and Types of Life Insurance Policy I have explained that 


In life insurance, the policy owner must show a recognized interest (insurable interest) in having the insured life continue. This interest must be shown when the policy is purchased. People are presumed to have an unlimited insurable interest in their own lives and may purchase any amount of insurance on their own lives that an insurer will issue. 

The question which might come to you now is what is insurable interest? The primary aim of this article is to answer that question.



1. What is an Insurable Interest?

Insurable interest simply means an interest which can be quantified in monetary value.  

In Technically term an insurable interest is a legal or equitable right or benefit, acquired when the insured object damaged, detriment or prejudice suffered, on the happening, or non-happening of the peril insured against.

In a contract of insurance for one to be compensated he has to prove that at the time of risk attaching to the subject matter of insurance, he had an insurable interest that is an interest in the object capable of being quantified in monetary terms. 

So a person has an interest in the object if he will be financially affected by the loss of that object.

 Example 
If the house you own is damaged by fire, The value of your house has been reduced by the damages sustained in the fire. Whether you pay to have the house rebuilt or you end up selling it at a reduced price, you have suffered a financial loss resulting from the fire. 

By contrast, if your neighbor's house, which you do not own, is damaged by fire, you may feel sympathy for your neighbor and you may even be emotionally upset, but you have not suffered a financial loss from the fire. 


You have an insurable interest in your own house, but in this example, you do not have an insurable interest in your neighbor's house.




If the insured wishes to enforce a contract of insurance before the Courts, he must have an insurable interest in the subject matter of the insurance, which is to say that he stands to benefit from its preservation and will suffer from its loss. 


The insurable interest is a must in any insurance contract and if there is no insurable interest the insurance contract is void and hence the insured cannot claim back the premium paid.

2. Test of Insurable Interest in Life Insurance

To determine whether there is an insurable interest in life insuranceThe following things are considered.
  • Direct legal or equitable relationship between the insured and the subject matter insured. For example; the insured may be the owner, beneficiary, or possessor of the subject matter.
  • That the said legal or equitable right existed at the time of the loss
  • That the said right or liability is capable of being evaluated in monetary value
  • That if the property had been continued to exist then it would benefit the insured in one way or another, while its destruction would economically inconveniences the insured.

3. Significance of Insurable Interest in Life Insurance

Life insurance helps the insured person to be fair in inheritance issue;

Example of a man who owns a small law firm he wants to leave for his daughter who is also a lawyer. 

He also has two sons, but they decided to become teachers, so they have no real interest in running a law firm. But the man wants to be fair to his sons, and he knows the law firm is his largest asset. So he will purchase a life insurance policy which names the two sons. 


This policy actually buys them out of any interest in the law firm.  Therefore the law firm owner has used his coverage in order to distribute his assets fairly to all children where a life insurance policy can provide a buyout option for the other surviving children when only one child will inherit a business.

In the case of Griffiths v. Fleming  [1909] 1KB 850 it was a case concerning life insurance.

A person has an insurable interest in his own life. 


A husband and wife have insurable interests in each other lives etc. as provided under the law. Therefore failure to establish some pecuniary loss likely to be sustained by the claimant on the death of the person whose life is insured, one will fail in that claim.

Life insurance is affected as a means of protection for the dependents and saving, the idea of indemnity is foreign to it.



4. Conclusion
This post explained the meaning of insurable interest in life insurance and it simply shows that Insurable interest is an interest which can be quantified in monetary value.  

Further, it explained the circumstances for existence of an insurable interest in life insurance, test of insurable interest in life insurance and the significance of insurable interest in life insurance.

Most people want to have this knowledge kindly help them by sharing this post. Sharing is Caring.

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References

Massawe M, et al(2012) Basics of Commercial Law in Tanzania, Karljamer Print Technolgy

Raoul C, (1970), The Law of Insurance, 3rd Ed, Sweet, and Maxwell, London.

Sleem N.A  &  Ateenyi T.K, (1992), General Principle of Insurance Simplified, N.A Saleem Publishers, Nairobi, Kenya.

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