Process

• Life insurance companies allow you to purchase life insurance on other people that you have an insurable interest in. An insurable interest is established when you have some personal and economic interest in the life of another person. In other words, you must suffer a personal and economic loss if the person you are insuring dies. An example of this might be if your spouse dies. You will lose his income. This, in turn may make it difficult or impossible to pay expenses that were previously shared between you both. But, it also may negatively impact your ability to save for your retirement. Thus, you would suffer a serious economic loss, as well as a personal loss, since the person was your spouse. Other examples of people whom you have an insurable interest in include your children or a business partner. In some cases, you may be able to insure your parents or even grandparents. In general, you won't be able to insure strangers.
  
  

Significance

• By establishing the principle of insurable interest, the insurance company ensures that the death benefit won't be used as a short-term investment. In other words, the death benefit won't be purchased on a stranger with the expectation that this person will die soon so that you can simply collect the death benefit. Since this activity could be used for criminal purposes, the insurance company also has an interest in ensuring that claims are not artificially increased beyond what the company's projections estimate claims should be.
  
  

Benefit

• The benefit of establishing an insurable interest principle is that you benefit from lower premiums than you otherwise would be able to obtain. If claims are higher than expected, due to criminal activity, then your premiums may need to be increased on some types of policies. Additionally, a spike in claims from insurance being purchased on lives that policyholders do not have an insurable interest in would jeopardize the insurer's ability to pay claims for you and all other policyholders.
  
  

Consideration

• When purchasing insurance on the life of another person, it's fairly easy to know whether you have an insurable interest in another human being. Your spouse and immediate family members are almost always allowed to be insured by you. However, if you are unsure, ask the insurance company prior to filling out an application. This will save you time and a possible denial of insurance.