Insurable Interest

MR. WATSON: When one person wants to purchase a policy on another person, there MUST be an insurable interest. The person buying the policy must prove that the death or disability of the proposed insured would cause a financial loss to the applicant. Some relationships automatically qualify as having insurable interest. Examples:

• Husband/wife
• Mother/Father
• Son/Daughter
• Sister/Brother
• Grandparents
• NOT aunts/uncles/cousins (requires proof of financial loss)
• Must exist at inception of the policy, not at the time of claim
• Business relationships

MR. WATSON: Insurable Interest only needs to exist at the inception of the policy, NOT at the time of claim.

MR. WATSON: Example: John and I go way back, about 30 years. We are the best of friends. Like brothers.

MAN: John is 65 years old and going through a mid-life identity crisis. He lives life hard. Sometimes he races hot air balloons, cliff dives, makes a dollar or two as an alligator wrestler.

MR. WATSON: John and I were sitting around one night and I said, "John, I want to buy a life insurance policy on your life. You are one crazy guy. I am going to be beneficiary." He said, "I don't care what you do."

MR. WATSON: Can I buy a policy out on my best friend and name myself as beneficiary with his permission?

STUDENTS: No.

MR. WATSON: No. No. No. When one person wants to buy a policy on another person, they have to show that that guy's death would cause a financial loss to the policy owner. How would I lose financially if he died? I wouldn't. So, i couldn't do it. This is called insurable interest . This reason for this is to prevent wagering or gambling.

MR. WATSON: Kelly!

WOMAN: Yes.

MR. WATSON: We live together and have for about 10 years.

MR. WATSON: Can I buy a policy on her life and name myself as beneficiary? Say it.. NOOOOOOO, no. I can’t. How would I suffer financially if she died?

WOMAN: Well, you live with her. She is helping you with the bills.

MR. WATSON: Doesn't matter. What if we owned a house together?

MAN: Then you have a financial risk.

MR. WATSON: Yep, but would I suffer financially if we were renting?

MAN: Yes.

MR. WATSON: No, not if you’re only renting. You can’t get an insurance policy on your roommate.

MR. WATSON: What if we were renting and she had my child? Then if I died, she'd stand to lose. Because of the child. Do you agree?

STUDENTS: Yes.

MR. WATSON: Just living together doesn't do it. Let me ask you a question. John and I are business partners. We have a $2 million business -- a million dollars my way, a million dollars his way. If I died, would he suffer financially, and vice versa? Yes.

MR. WATSON: So I buy a policy for a $1,000,000 on John. He buys one on me. Six months later he buys me out of the business. So I move to California. No strings attached. Bought me out. Paid cash. We're done. I moved to California. I forgot to tell my CPA, Mrs. Russell, to cancel these insurance premiums. So for 20 years she's been paying the premiums on my behalf. I get a phone call 20 years later that says, hey, Dave, John died. I go, “Oh, no. Oh, that's too bad!” And I’m fanning myself with a $1,000,000 policy!

(Laughter.)

MR. WATSON: Do I have insurable interest in his life now? No! Would his death cause me a financial loss? No. So will I get the premiums paid back to me over all those years or the death benefit?

STUDENTS: Death benefit.

MR. WATSON: Yes, you get the death benefit. Insurable interest only needs to exist at the inception of the policy.

MR. WATSON: Insurable interest only needs to exist at the inception of the policy. At the beginning.

MR. WATSON: Everybody has an insurable interest in their own lives and can name anyone as beneficiary. But, when one person buys a policy on another person the policy owner must stand to lose upon the death or disability of the insured.

MR. WATSON: Did I have a financial interest in my life?

ALL: Yes.

MR. WATSON: Right. So I can name Fido the dog as beneficiary if I want to (not really). When one guy wants to buy a policy on another he has to prove that there would be a financial loss. Insurable Interest helps prevent wagering, gambling...But you always have financial interest in your own life. Some relationships automatically have insurable interest such as Mother, Father, sister or brother. But not cousins.

MR. WATSON: Without insurable interest, it would simply be a wager. People would be buying policies on each other left and right?

MR. WATSON: How would you like somebody to buy a policy on you for about $3 million? Have an ex-boyfriend, ex-husband? Think about him. He now owns a $5 million policy on you. What would you think?

STUDENTS: Not so good.

MR. WATSON: And we can't do it because there is no insurable interest.