A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Car Insurance Agent

UPDATED: Jan 18, 2017

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Don't miss these facts...

  • The doctrine of insurable interest is very important when naming a beneficiary
  • Financial and emotional relationships are key in who to insure
  • Named beneficiaries are important because they pinpoint intent
  • A life insurance contract is a unilateral contract which offers security to the policyholder
  • Life insurance creates certainty in an uncertain world

The answer to that question is yes. It is a long-standing principle in the naming of beneficiaries that there needs to be an “insurable interest” to legitimately name a beneficiary.

A good definition of insurable interest is that the beneficiary needs to have more to gain from a person who is insured to keep on living than there is to gain from the person dying.

In this case, where a wife wishes to insure her husband, that would certainly be true.

In a marriage, there are two basic considerations in this relationship of insurable interest.

The first is that of matrimonial love, which when in place vouches for the need for one spouse to cherish and perpetuate the relationship.

Out of emotion, loyalty and the desire to continue the marriage in the same manner that it was begun is reason enough for the insurable interest to be there.

The second reason for establishing insurable interest in the case of a marital relationship is a financial one. Whether both spouses are working, or not, it can easily be shown that there is a financial need for both spouses to stay alive.

A wife, in this case, wishes to insure her husband with life insurance to offset the loss of income and security if he should die. There may be children to raise, a mortgage to pay off, and other expenses to deal with due to the loss of a breadwinner.

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The Reason For Insurable Interest

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There is a very good reason for the establishment of insurable interest. If just anybody could be named as a beneficiary on a life insurance policy, the result would not necessarily be good. It would open the door for adverse selection, which is an insurance term for disaster.

If you think about it, naming anyone as a beneficiary on a life policy might just put that person in danger.

One would think, that in our modern society, there would be no room for any skullduggery or plots of murder, but it is due to safeguards that are put in place which avoids even the temptation of such occurrences taking place.

The doctrine of insurable interest is one kind of safeguard.

Naming A Beneficiary is Important

In our example of the wife taking out life insurance on her husband, it is very important that a named beneficiary be exercised. Most likely the spouse is going to be the beneficiary.

It is also likely that the husband will be named a beneficiary of a life insurance policy on the wife, as in our society we experience both spouses working and having a definite economic value to the family.

If no beneficiary is named on the life policy and if a death occurs while the beneficiary is unnamed, the death proceeds will automatically go to the estate of the insured.

This will possibly confuse the original intent of the insured as to whom the proceeds should be directed toward, and it will undoubtedly delay the administration and distribution of the funds.

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The Beauty and Efficiency of Life Insurance

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There is no other legal instrument that will allow an individual to arrange for the creation of an instant estate which is locked in by contract at death, to be paid to the individual, individuals, or entity for a steep discount to be paid over time.

Where else could a person put down less than 1 percent and create an instant estate with the knowledge that if something happened where the insured failed to wake up the next morning, his beneficiary would receive a thousand times the money?

That’s not a bad deal, by anyone’s definition.

Other Reasons For Life Insurance Purchases and Other Beneficiary Designations

  • Our initial example of a wife taking out life insurance on her husband is a legitimate use and purpose for life insurance. People buy life insurance on other people who, if they should happen to die, would leave someone in a worse financial condition due to the death.
  • The most common purchase of life insurance is between spouses, but life insurance on children is a valid concept as well. It is prudent to purchase a small policy on children, with a possible future insurability option that allows them to guaranteed additional insurance at older ages.
  • A business might take out a policy on a key individual or employee who plays an important role in the profitability of the business. An outstanding salesperson, an astute tech person, or a talented procurement manager would all be individuals who would be missed from a financial standpoint. The business would purchase a life insurance policy on that individual, pay the premiums, and the business would be the beneficiary.
  • A partnership or a close corporation commonly uses life insurance to fund a buy and sell agreement. In a partnership, if a partner dies, the partnership has to be reformed. With life insurance covering the individual partnership interests, the deceased partner’s heirs can receive the full value of the deceased partner’s interest in exchange for the deceased partner’s share of the business. The same holds true for a close corporation where there is an exchange of the deceased stockholder’s interest in the business for the value of the stock paid to the family via the life insurance.

Life Insurance is A Unilateral Contract

The very nature of the life insurance contract makes it ideal for the purpose for which it is used.

Life insurance is a unilateral contract, meaning that the only person who can change the nature of the insurance contract is the policy owner.

The life insurance company cannot change their end of the contract at all.

The unilateral contractual status of a life insurance policy is extremely important because it assures the beneficiary that the contractual status is secure as far as the insurance company is concerned.

Giving the owner of the life insurance policy the right to change the beneficiary, change the policy, and the payment terms offer enough flexibility to make the life insurance transaction flexible as far as the administration of the policy.

In Conclusion

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Life insurance almost seems to good to be true, as one person who has an insurable interest in another person can take out a life insurance policy to cover lost income and expenses if the first individual should die prematurely.

This would include spouses, children, business partners and shareholders and anyone else who would stand to lose if the insured person should die.

Life insurance contracts are backed by solid life insurance companies which have years of trackable results as far as the payoff of claims and outstanding financial responsibility. The history of all the major companies is public record and available to all who wish to view it.

Because of the contractual nature of a life insurance transaction, stability and assured financial success are made possible by the legal ramifications of the life insurance arrangement between the insured and the beneficiary.

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