Life insurance plans provide financial security to your family in case of your unexpected death during the policy term. It will help them suffice to accomplish their future financial goals. We know that a life insurance plan nominee can be a dependent family member such as your spouse or children. However, even your close friend or relative can purchase a life cover policy if they have an insurable interest in your relationship with them. So, what is an insurable interest in life insurance plans? Let us discuss it here.
What Is Insurable Interest In Life Insurance?
When you are planning to purchase a life cover policy for another person, you should have an insurable interest in their life. Insurable interest means you will have an emotional or financial loss in the event of the unexpected demise of that person. Insurance providers evaluate this insurable interest before approving the application for the life-cover policy.
Let us understand the insurable interest in insurance with an example.
Mr Rana wanted to purchase a life cover policy for his closest friend Mr Ramesh and appoint himself as the nominee. However, the life insurance provider denied the purchase because Mr Rana did not have an insurable interest in the life insurance plan for Mr Ramesh.
There will be an insurable interest in the life cover policy if the nominee receives a monetary benefit due to the existence of the insured person. In the example above, Mr Rana should have a monetary benefit due to the existence of Mr Ramesh. In that case, the insurer will approve the purchase of the life cover policy at any time.
Insurable interest is the basis of any life insurance plan. It defines the relationship between the life insured and the nominee.
Why is Insurable Interest Important While Buying Life Insurance?
Individuals can optimise the benefits of the life cover to their advantage, depending on the terms and conditions of the life insurance plan.
If there is no concept of insurable interest, any person can avail of a life cover policy for any other individual and receive the payout benefits during their unexpected demise. And such scenarios can lead to fraud incidents causing financial loss to the insurance providers. Therefore, the different types of insurable interest will ensure individuals don't take undue advantage of the financial benefits from life insurance policies.
Who Can Have Insurable Interest In Life Insurance?
Insurance providers detail the categories of people who can have an insurable interest in life insurance. Here is a detail about it for your reference.
- Blood relations - Your parents, spouse and children dependent on your income for their survival will suffer financial losses in case of your unexpected demise. Therefore, they can have an insurable interest in life insurance. And the death benefit will help them fulfil all the important financial obligations in your absence. Insurable interest does not apply to uncles and aunts, cousins, stepparents and stepchildren, nephews and nieces, etc. unless there is proof of financial dependency.
- Employer - If you as an employee are an important asset to your organisation, your demise can substantially cost the employer. In such cases, your employer has an insurable interest and can avail of a life insurance cover for you.
It will be considered a key person insurance policy wherein your employer will purchase the life insurance plan, pay the premiums regularly and receive the death benefits in case of your unexpected demise. The death payouts from the insurance provider will cover the monetary losses suffered by the employer. The employer can also opt for an employer-employee insurance policy for the employee to insure their life. This arrangement also suggests that the employer has an insurable interest in the employee.
- Creditor - If you have availed of financial loans, your creditor can purchase a life cover policy for you as they will suffer a monetary loss in case of your unexpected demise.
The insurable interest is a non-negotiable feature. It will be verified during policy inception and also during claim settlement. You must contact your insurance provider regarding the necessary proof of evidence to ascertain the insurable interest. Without the acceptance of the insurable interest, life insurance can be considered void.
When you purchase a life cover policy, you need to understand the features and benefits that suit your financial needs and affordability. And more importantly, you have to ensure the presence of insurable interest to be applicable for the benefits. You can opt for the online life insurance policy or the offline one after understanding the details of the policy features and benefits.
For example, when you purchase our Tata AIA life insurance policy, you can read and understand the features, determine the applicability based on the insurable interest, calculate the affordable premium and decide on the life cover policy purchase.
Life insurance is a financial instrument that provides the death benefit to the nominee in case of your unexpected demise during the policy term. Your insurance provider will review your applicability of the life cover policy based on insurable interest to validate the application and provide the benefits as required. Insurable interest is the basis for any life-cover policy that will ascertain the relationship between the insured and the nominee regarding the existence of a financial dependency.
Therefore, it will qualify for the disbursement of the death benefit to your nominee during the policy tenure. So, understand the terms and conditions and choose the life cover policy for the required individuals based on insurable interest!