I’ve been trying to explain life insurance financial justification to a client of mine today. He wants to buy a policy so if he dies a friend of his would be the beneficiary and will have enough money to buy a house from the insured’s Dad.
A noble idea and a generous thing to do, but it really doesn’t meet the life insurance standard for insurable interest and financial justification. The fact that the friend won’t be able to buy the insured’s Dad’s house if the insured dies isn’t making him whole again. It’s not making up for a financial loss that the friend would incur. It is, to be blunt, enriching the friend in a situation where there is no loss.
Companies sometimes let these things slide, but that is becoming less and less common. To a greater extent insurance companies are wrestling with the whole insurable interest argument when it comes to investor owned life insurance or life settlements. It’s a different structure than the friend situation above, but the same question. Why should someone who has no financial connection to the insured profit from their death? That’s not what life insurance was intended for. That is not a scenario that would have moved government to make life insurance proceeds income tax free.
So, what is insurable interest? A person has an insurable interest in the insured if they would suffer a financial loss upon the insured’s death. I know 30 years ago when I worked for Mutual of Omaha no one cared about this kind of stuff. But you know what? Back then greed wasn’t as pervasive in our culture as it is now. Greed finally became so common that it started getting kind of stupid. I talked to a client that wanted to take out a life insurance policy for their girlfriend to help show the sincerity of their upcoming marriage proposal. When she said no he canceled the application. He admitted he just applied for it to impress her.
Bottom line. Just rambling a bit today. Some days people bother me.