Insurable Interest: Definition & Examples

KEY TAKEAWAYS

• Insurable interest is what links the owner of an insurance policy with what they’re insured for. 
• To use insurable interest, whoever the policyholder is will need to purchase insurance on the specific item.
• Insurable interest is something that covers things that would result in some type of financial hardship for the owner of the policy.

What Is Insurable Interest 

Having an insurable interest in something means that you either own it, own part of it, or would suffer financial hardship should something happen. If whatever you owned was lost, destroyed, or damaged, you would suffer a monetary loss. So if one of these things happened, insurable interest would help offset the financial loss you face.

It’s basically a type of investment that’s going to protect you from a financial loss. You can have an insurable interest in a range of things, as long as it is an action, an item, or an event. And it’s not just a financial loss, other types of hardship could also get covered. 

For this to happen, you would need to take out an insurance policy that protects the item, event, or action you own. Having this insurance policy and insurable interest would limit the risk if something happens. For example, if it’s lost or damaged. 

Why Is Insurable Interest Important?

Most insurance policies are required by law to have insurable interest included in them. For example, you wouldn’t be able to take out an insurance policy on a property if you don’t have an insurable interest in it. 

Insurable interest is a requirement for issuing an insurance policy. It makes the policy legally valid and protected against any intentionally harmful acts. Therefore, you wouldn’t be able to take out an insurable policy to cover something you don’t own. This is since you wouldn’t actually be the one at risk of financial loss and it’s known as a moral hazard.

How Do You Determine Insurable Interest? 

In the simplest terms, insurable interest is determined if you have a legitimate interest in the item, event, or action in question. For example, as the owner of a property, you would have an insurable interest in that property. 

Now, if there were more than one owner of the property, it would depend on the proportion of their individual ownership. So if you and someone else each own a property equally, you would both have an insurable interest in 50% of the property through homeowners insurance or property insurance. 

It would work the same way if you had business partners and had varying stakes in a company. And this could potentially come in different forms, such as business owners life insurance. 

What Are Some Examples of Insurable Interest? 

Life insurance policies will also include insurable interest. For example, let’s say that you have a two-income household with your spouse. Your spouse would have an insurable interest should you happen to die. This is because that would create a financial hardship to transition from two incomes into one. 

Some of the specifics of life insurance can vary depending on the life insurance company. This is why it’s important to speak with your insurance agent to learn about every aspect of life insurance that you need to know. 

One of the primary reasons that an insurance company uses insurable interest, especially with life insurance, is to prevent the possibility of insurance fraud. For example, you wouldn’t be able to take out a life insurance policy on a random person just to collect a payout from their death.

Summary

Insurable interest is a way to ensure you’re protected from a financial loss or hardship should something unfortunate happen. One of the easiest ways to describe it is in the form of insurable interest in life insurance. As the insured person, you would receive insurance proceeds through a death benefit should your spouse pass away. 

There are many types of life insurance and other insurance policies that cover the insurable interest. To avoid any counts of insurance fraud, speak with your licensed insurance agent to better understand any regular or life insurance regulations. The type of life insurance policy, for example, could have different costs to insurance companies.