Life Insurance – Insurable Interest

Going back to the 1894, Texas Supreme Court opinion, Cheeves v. Anders, it is a well settled proposition in Texas law that it is well-settled that a life insurance beneficiary must have an insurable interest in the insured’s life.

The basis for the rule is twofold: no should have a financial inducement to take the life of another; and a life insurance policy for the benefit of one without an insurable interest is a wagering contract.

As an example, in the 1998 Houston Court of Appeals [14th.] opinion, Tamez v. Certain Underwriters at Lloyd’s, London Int’l Acc. Facilities, an employer bought a life insurance policy on the life of its employee.  The employer argued that the Texas Insurance Code does not require an insurable interest.  The court held that the statute does not eliminate the judicial requirement of a beneficiary’s insurable interest in the insured’s life.

Those who have an insurable interest in the life of another fall into three general classes according to the 1942, Texas Supreme Court opinion styled, Drane v. Jefferson Standard Life Ins. Co.:

  1.  one so closely related by blood or affinity that he or she wants the other to continue to live, irrespective of monetary considerations;
  2.  a creditor; or
  3. one having a reasonable expectation of pecuniary benefit or advantage from the continued life of another.

The third category has been explained in the Drane case:

Bluntly expressed, insurable interest under (the third) classification, is determined by monetary considerations, viewed from the standpoint of the beneficiary.  Would he regard himself as better off from the standpoint of money, would he enjoy more substantial economic returns should the insured continue to live; or would he have more, in the form of the proceeds of the policy, should she die?

The 1968, Texas Supreme Court opinion, McAllen State Bank v. Texas Bank & Trust Co. says a creditor may designate itself the beneficiary of a policy purchased by it on the life of its debtor, but its insurable interest is limited to the loan balance at the insured’s death; the rest of the policy proceeds belong to the insured’s estate.