Definition of "Insurable Interest"

A relationship between an insured person or property and the potential beneficiary of the insurance. This requirement must be present at the time the life insurance policy is applied for but doesn't need to exist at the time of the insured's death. Insurable interest exists because there is a reasonable expectation that the beneficiary will benefit from the continued life of the insured, or experience a loss at the death of the insured.

This is an important concept in life insurance. At the time a life insurance policy is purchased, there must be an expectation of a monetary loss by the person purchasing the insurance that would result from the death of person that is insured. The insurable interest need not necessarily exist at the time of the death of the insured. An individual has an unlimited insurable interest in his/her own life. An insurable interest may not only exist between family members, like husband and wife, parent and child, but also between business partners, creditor and debtor and employer and employees.

This is all to do with the fact that you can not insure a stranger in the street. In order to take out an insurance policy on another person you have to demonstrate insurable interest. In legal terms this is the principle which insists that no policy will be issued unless the policy owner and beneficiaries would be in a position to suffer a financial loss at the death of the insured. Examples of this are spouses children even co-directors of a company as they would suffer a financial loss in the event the other was to die, therefore there is an insurable interest.