Financial justification simply keeps the amount of insurance in proportion to the actual financial loss. The idea is that life insurance is a tool to replace a loss, not create wealth where there previously was none. My best stab at an analogy would be if you could insure your 2000 Toyota Camry, not for it’s replacement value, but let’s say for $100,000. If you wreck the Camry you then have the opportunity to upgrade to a very pricey Mercedes. I don’t see a lot of auto insurance companies jumping on that idea and I don’t hear many people asking why not. Creating wealth where there was none is not good business.
Insurable interest is another one that life insurance companies take pretty seriously. Insurable interest simply asks the question, “what financial loss would you suffer upon the death of the insured?” In the absence of insurable interest as a check and balance, we might be able to talk a relative, say our mother, into letting us purchase a large insurance policy on her as kind of an investment. If that policy was for $250,000, the query from the company would be show them that you would lose $250,000 upon the death of your mother who makes $9000 a year on social security.
We are frequently asked for life insurance quotes that don’t meet the criteria above. In the case of financial justification, as their independent life insurance agent we have to explain the criteria used and the maximum amount of coverage is that a life insurance company will approve.
With insurable interest we are often having to explain that, while a burial or final expense policy might be very appropriate, a large policy on mom as an investment is not going to fly.
Important questions to consider when considering life insurance.
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