Maintenance of Insurable Interest
Insurable interest must not only exist at the inception of the life insurance policy but must also continue throughout the life of the policy. This ongoing requirement ensures that the policyholder maintains a legitimate financial stake in the insured individual’s life.
There are certain situations where insurable interest may cease to exist, such as:
Termination of Relationship
- Divorce or Annulment: If the policyholder and the insured individual divorce or annul their marriage, the insurable interest based on their marital relationship may terminate.
- Emancipation of a Child: When a child reaches the age of majority or becomes legally emancipated, the parent’s insurable interest based on their parental relationship may cease.
Financial Changes
- Repayment of Debt: If the policyholder has insured the life of a debtor and the debt is fully repaid, the insurable interest based on the creditor-debtor relationship may end.
- Termination of Business Relationship: If the policyholder has insured the life of a business partner or employee and the business relationship ends, the insurable interest based on that relationship may cease.
Assignment and Change of Beneficiary
The presence of insurable interest plays a crucial role in determining the ability to assign or change beneficiaries in a life insurance policy.
Assignment of Life Insurance Policy
An assignment involves transferring ownership of the policy to another person or entity. For a valid assignment to occur, the original policyholder must have an insurable interest in the life of the insured at the time of the assignment. This means that the policyholder must have a financial or emotional stake in the insured’s well-being. Without an insurable interest, the assignment may be deemed void.
Change of Beneficiary
Changing the beneficiary of a life insurance policy involves replacing the existing beneficiary with a new one. Insurable interest is not a requirement for changing beneficiaries. However, if the original beneficiary has an insurable interest in the insured’s life, they may have certain rights, such as the right to contest the change of beneficiary if it was made without their knowledge or consent.
Case Studies and Examples
Insurable interest principles find practical application in various life insurance scenarios. Here are some case studies and examples to illustrate their relevance:
Establishing Insurable Interest
Establishing insurable interest requires a genuine and substantial relationship between the policyholder and the insured individual. In a case involving a husband and wife, the husband had an insurable interest in his wife’s life due to their marital bond and financial interdependence.
Termination of Insurable Interest
Insurable interest can terminate when the relationship between the policyholder and the insured individual ceases to exist. For instance, if a policyholder divorces their spouse, their insurable interest in the ex-spouse’s life typically ends.
