What if your neighbor, who doesn’t like you at all, could take out life insurance on you without your knowledge or consent? What if you are in your 70’s or 80’s and your child or caregiver could take out life insurance on you without you being a party to what was happening? What if you were a child and your parent could take out a large amount of life insurance on your life?
The life insurance industry check valve for that neighbor is called insurable interest. A person must have a true interest in the person’s life and it’s continuance, in order to meet the threshold of insurable interest. It is this check valve that prevents life insurance policies from being taken out with the idea in mind that a person could be moved on toward premature death, and someone who did not have an interest in their living would profit from that death.
I think we can all agree that having some final expense insurance on a parent or a child is not a bad thing, actually, probably a prudent thing to do. When the amounts become large in comparison to the financial final expense loss, financial justification comes into play.
I have seen cases where parents who carry, say $250,000 of life insurance on themselves, look into carrying a similar amount on a child. Financial justification simply lays out the premise that the amount of insurance should reflect the actual financial loss upon someone’s death. In this case, while losing a child is certainly an emotional trauma and loss, unless the child was an entrepeneur of sorts and you were actually dependent on their income, carrying as much on them as you carry on yourself is crazy.
The very premise of life insurance is that someone who suffers a financial loss due to a death can be made whole again. With that said, financial justification sets aside the idea of using life insurance as an investment or profiting from the purchase of life insurance.
Bottom line. As much as life insurance agents love to make a sale, a good agent will question and refuse to take part in any inquiries that go out of bounds on insurable interest and financial justification.