Insurable Interest in Finance

Insurable Interest

The interest, which the assured possesses in the subject matter in a contract of insurance, is known as insurable interest. It represents a person’s financial investment or economic stake in the subject of insurance. It is defined as the reasonable concern of a person to obtain insurance for any individual or property against unforeseen events such as death, losses, etc. The interest must be of a pecuniary nature i.e. the loss to be suffered must involve money. It can be present in many situations like marriage, but it is evaluated by the insurance company during the application for the policy and before payment of the death benefit. In the case of life insurance, it refers to the potential needs the beneficiary will require from the financial loss of the insured person. It is present in life insurance when an individual receives a financial or another type of benefit from the continued existence of the person insured. is present in life insurance when an individual receives a financial or another type of benefit from the continued existence of the person insured. It is an essential requirement for issuing an insurance policy that makes the entity or event legal, valid, and protected against intentionally harmful acts.

Insurable interest is simply defined as the level of hardship a person will suffer from the loss of something or someone they have insured. A person is expected to have a reasonable interest in a longer life for himself, his family, business and hence is in need of acquiring insurance for these. Insurable interest exists to prevent the moral hazard individuals have from taking out insurance policies for the wrong reasons. Therefore, it is often related to ownership, relationship by law, or blood and possession. It is a basic requirement needed to make any life insurance contract valid. Therefore a person or entity cannot purchase an insurance policy to cover themselves in the event of a loss. However, it is not an important element of life insurance contracts under modern law. The concept of insurable interest is fundamental to commercial property insurance.

Insurance is a method of pooled risk exposure that protects policyholders from financial losses. Insurable interest is a type of investment that protects anything subject to a financial loss. It is a principle that states that an insured may not collect more than its own financial interest in property that is damaged or destroyed. It specifically applies to people or entities where there is a reasonable assumption of longevity or sustainability, barring any unforeseen adverse events. The term interest here refers to necessity or motivation, and has no relation to traditional banking or accruing of wealth. The policy must not create a moral hazard, in which a policyholder would have a financial incentive to allow or even cause a loss.