A beneficiary may procure insurance upon the life of an insured only if he has an insurable interest in that insured’s life. The determination of whether the beneficiary has an insurable interest depends upon the nature of the relationship between the beneficiary and the insured. If the beneficiary has a valid, insurable interest, he may recover the insurance proceeds upon the insured’s death. If he does not, however, the insurer may plead a lack of insurable interest and avoid liability on the policy.

Relationship or direct interest

An insured has an insurable interest in his own life. Thus, he may procure an insurance policy himself and make it payable to his estate or to any other person with or without an insurable interest in his life.

A relationship by blood or marriage is usually evidence of a beneficiary’s insurable interest in the life of an insured. A pecuniary interest, such as between an insured debtor and a creditor, may also sustain recovery under the insured’s policy. An insurable interest may also be supported by a beneficiary’s legal or moral claim for services or support from the insured.

A beneficiary need not show that he has an insurable interest if the policy is payable to him as a guardian of a ward who has an insurable interest or as a trustee of a trust that has an insurable interest.

Contractual relationship

If a beneficiary has no relationship with or direct interest in the life of an insured, he may have an insurable interest based on a contract that he had authority to make. The contract, however, may not be a “wagering” contract, which will be found void. A wagering contract is one that furnishes a temptation to the beneficiary to terminate the insured’s life by unfair means in order to recover the policy proceeds. For example, a beneficiary’s agreement to pay an insured’s wife to take out policies on the insured’s life payable to the beneficiary would be considered a wagering contract and would not provide an insurable interest in the beneficiary. A contract may also be considered a wagering contract if the insurable interest is small and the insurance is vastly disproportionate. Another type of wagering contract involves the procurement of a policy pursuant to a contract with the beneficiary who does not possess an insurable interest with the understanding that such beneficiary would pay all premiums.

Effect of no insurable interest

If a beneficiary with no insurable interest takes out an insurance policy on an insured’s life, the insured or his estate may have several remedies. The insured may cancel the policy if he never consented to it. In addition, if the beneficiary procured the policy with the intent to murder the insured, the insured or his estate may recover damages from the insurer caused by such intent of the beneficiary.

However, once the insured is dead, many courts have held that only the insurer, and not the insured’s estate, may object to the beneficiary’s lack of insurable interest. In addition, the insured may have no remedy against the insurer even if the policy was taken out without his consent if it was later cancelled without the insured having suffered any injury.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.