Well, it used to be that people would purchase life insurance through an employer to cover their spouse and dependents. In the last few decades, we’ve witnessed the redefining of the family unit. Some dependents are now connected by common law marriage, gay marriage, foster parenting, or other arrangements. This means that brokers and individual sellers must market life insurance products to people who want to become premium payers for a broader range of scenarios. Policyholders will take out insurance against someone who might die and leave them financially responsible for his or her debts. Even in the case of adult children living at home, if parents can take out a life insurance policy on them, the insurance carrier may limit how much the payout would be upon that child’s death.
What is Insurable Interest?
I enjoyed reading a news article on insurable interest from First Coast News, which states that insurance companies need to find the stake that one person has in another’s death. So, a romantic partner or a business partner could qualify as someone whom you can purchase life insurance for because you will experience an emotional or a financial loss if he or she dies. On the other hand, the author points out that just insuring a total stranger or someone you barely know wouldn’t qualify.
Another Perspective on Insurable Interest
Let’s consider the perspective of an insurable interest for a life insurance policy owner who has an adult child living at home. Just because the child lives at home doesn’t mean there is a financial stake. However, if the adult child has outstanding student loans that would need to be paid upon her death, then the parent might be able to get a life insurance policy. The insurance company will consider if the policy owner would face a personal risk or a financial loss. However, if the person named in the policy dies, the policy owner or beneficiary should not receive a personal gain from the payout.
Who Do You Need to Insure?
When you’re considering purchasing life insurance on another person, be prepared to explain to prospective carriers what your financial interest is in that person. With a property you want to insure, it’s more straightforward. An insurance carrier can consider how much is left to repay on the mortgage note and any home equity loans. Upon the death of the person you want to insure, the insurance carrier will determine if you have a reasonable insurable interest. Let’s consider a different scenario. If you have an adult child living at home with no college debt who can work but is not working or perhaps is working part-time, then an insurance carrier would be within its rights to refuse to underwrite the policy. It would be hard to prove the financial interest you have in your child’s death.
Think Outside the Box
Not all life insurance carriers use the same set of underwriting guidelines. Some companies may be willing to insure someone that you care about, but they may decide to charge a monthly premium that exceeds what you wish to pay. Another possibility is that the payout benefit will be too low, but it is the only amount that a company will offer you for your deemed financial interest. That’s why you work with a life insurance agent to determine which company offers the type of product that fits your situation. Keep these points in mind as you shop:
1. Compare quotes from different insurance carriers as well as the limitations under which the policy will pay out a benefit.
2. Don’t rush into buying a life insurance policy because it has the lowest monthly premium or because the person who tries to sell it to you exclusively represents that insurance carrier.
3. Ask yourself what is the seller’s potential benefit from writing a policy for the person whom you want to insure. If the seller earns a commission, he or she may not be steering you towards the best product for your financial interest.
As a broker of life insurance and annuity products, I can point you towards a range of products near your clients’ price points that will truly fit their current financial situations.