Insurable Interest & Life Insurance

Not just anybody can be a beneficiary to a particular life insurance policy.  The person must have an insurable interest.

A 1894, Texas Supreme Court case styled, Cheeves v. Anders, makes clear that it is well settled that a life insurance beneficiary must have an insurable interest in the insured’s life.

The basis for this rule is twofold: 1) no one should have a financial inducement to take the life of another; and 2) a life insurance policy for the benefit of one without an insurable interest is a wagering contract.  (It should be pointed out there are legal ways to have a life insurance policy on another).

In the 1998, case styled, Tamez v. Certain Underwriters at Lloyd’s, London International Acc. Facilities, the 14th Court of Appeals discussed this insurable interest principle.  In Tamez, 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.

As a side note – the way to own a policy wherein the beneficiary does not have an insurable interest in the life of the insured is written in the Texas Insurance Code, Chapter 1111A.  This part of the Insurance Code deals with Life Settlement Contracts.

To purchase a policy where one does not have an insurable interest, a specially licensed insurance agent is required.  The purpose of allowing this to occur is primarily for when an insured is chronically ill and facing death and thus, the insured is allowed to sell the policy to a third party in order to receive funds to live on in the present.  The  most common circumstances when this occurs would be when someone is diagnosed with terminal cancer or AIDS or some other type of terminal illness.