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Insurable Interest Explained

By Byron Udell | October 28, 2008

What is Insurable Interest?

A lot of people often ask the question, “what is insurable interest and why is it a must have when buying a life insurance policy?” For purposes of life insurance policies, everyone is considered to have an insurable interest in their own lives and in the lives of their spouses and dependents.  For life insurance, this interest only needs to exist at the time the policy is purchased.  Business partners may have an insurable interest in each other.  A corporation may have an interest in its employees’ lives, particularly key employees.

However, the insurable interest only needs to exist at the time the policy is purchased.  This means people can sell their life insurance policy to anyone they wish in a “life settlement” transaction.  A life settlement is the sale, assignment, transfer, or bequest of the death benefit or ownership of a life insurance policy by the owner of the policy.  Typically, the owner of the policy receives cash (generally an amount greater than the cash surrender value in the policy, but less than the full amount of the death benefit);.  The life settlement company becomes the new owner and beneficiary of the policy and is responsible for the payment of all future premiums.  Upon the death of the insured, the death benefit is paid to the life settlement company.

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