I watched Dennis the Menace the other night and early on in that film it was clear that Mr Wilson would have preferred to have $100,000 in his pocket and no Dennis as a neighbor. That’s probably a bit harsh, but the answer as to why he couldn’t have that is called insurable interest.
Insurable interest is one of those rubs that I get to deal with every once in a while when someone calls and wants to get quotes on their aging mother for $250,000. They are inevitably put out when I ask them what the purpose of the insurance is. Sometimes it is genuine and clear cut. Mom owes a quarter of a million on her house and wants to leave it debt free to her children.
Other times it’s way murkier. Mom is poor and they don’t see any inheritance coming (like it’s a right for them to have one), so they want to create an inheritance by insuring Mom. The issue with insurance companies is called insurable interest. The insurable interest question is “what loss occurs upon Mom’s death that requires $250,000 of life insurance to make the family financially whole again?”
We all know that there are plenty of policies that have been put in force over the years with no insurable interest. One of the questions that swirls around the whole life settlement issue is whether an investor truly has insurable interest when they buy a life insurance policy from someone who wants some cash and sells theirs, but that’s a subject for another post.
The question in my mind with a lot of these “Mom” deals is, down the road is their heart going to be with Mom or with that life insurance policy? Suppose they buy a term insurance policy and it is coming to the end of it’s guaranteed level premium period. Are they going to be thinking about all the money they’ve put into that policy and the possibility of striking out or will they just be glad Mom is still around?
Bottom line. Life insurance is not and should not be a means to profit. It was never designed for that and never meant for that. Mr Wilson didn’t have an insurable interest in Dennis and you don’t have an insurable interest in anyone unless their death causes you a financial loss.