Life Insurance – Insurable Interest

Dallas life insurance lawyers need to know a basic rule of life insurance. This rule is the designated beneficiary must have an insurable interest in the life of the insured.
Beginning in an 1894 case, the Texas Supreme Court has said many times 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 reason 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.
So who has an insurable interest – how is that defined in Texas?
Those who have an insurable interest in the life of another fall into three general classes:
(a) one so closely related by blood or affinity that he or she wants the other to continue t live, irrespective of monetary considerations;
(b) a creditor; and (c) one having a reasonable expectation of pecuniary benefit or advantage from the continued life of another.
Category (c) has been explained this way by the Texas Supreme Court, in the 1942 case, Drane v. Jefferson Standard Life Ins. Co. The Court said:
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 proceeds of the policy, should she die?
Category (b) allows a creditor to designate itself the beneficiary of a life insurance policy purchased on the life of its debtor. Sometimes this type of policy is required before a loan will be allowed. The most common forms of these creditor policies are “credit life polices” that are obtained at the same time as a car or home loan is taken out. However, a 1968, Texas Supreme Court opinion tells us that 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.