I frequently receive calls from people interested in taking out a life insurance policy on a friend, parent or distant relative. The first question I typically ask is, “what is your insurable interest,” as this is a question the insurance companies will always want an answer to. This can be a confusing term to some, so I am going to briefly discuss it here.

According to the Insurance Dictionary, Life & Health Edition, Insurable Interest is the interest arising when one person has a reasonable expectation of benefiting from the continuance of another person’s life or of suffering a loss at his or her death.

In life insurance, a person generally is considered to have an unlimited insurable interest in himself or herself. However, a person must have an insurable interest in another person at the time of application in order to insure the other’s life. Where no insurable interest exists, policies obtained by one person on the life of another are not enforceable by law since they are considered contrary to the public policy.

Who has an insurable interest? A spouse would certainly qualify, as would dependent children. A business partner would have an insurable interest, as would a business owner taking out a policy on a key employee. The test is would you suffer a financial loss if the insured person were to die? If the answer is yes, then there is most probably an insurable interest.