B—Insurable Interest

In order to prevent the use of life insurance as a vehicle for financial speculation based upon the continuance or non-continuance of the life of any given individual, a party acquiring a life insurance contract must have an insurable interest in the life of the insured.  When the insured applies for a policy on his own life, an insurable interest is deemed to exist, and the individual can generally name any person he desires as the policy beneficiary. Issues can potentially arise, however, when a policy is acquired on the life of a person other than the owner of the policy.  Insurable interest rules are a matter of state law, and these laws vary among the states.

What Constitutes Insurable Interest

In its early days, life insurance was sometimes used as a gambling arrangement. It was common practice for persons to take out policies on the lives of others, purely for speculative purposes—a practice decidedly hazardous for the insured if the speculator undertook to reap his profits quickly. As a result, an Act of the British Parliament in 1774 required that persons contracting for life insurance must have a definite interest in the life of the insured or the insurance would be void [14 George III, c. 48]. To take the insurance contract out of the class of death-based wagers, there must be reasonable ground, founded upon the relations of the parties to each other—either pecuniary or of blood or affinity—to expect some benefit or advantage from the continuance of the life of the insured [Warnock v. Davis, 104 U.S. 775 (1881)]. It is the presence of this insurable interest that transforms life insurance from an instrument of wager into one of protection against loss. Life insurance policies without insurable interests are unenforceable because they are wagers and incentives to crime, and thus are, by law, void as against public policy.

A statement from a leading United States Supreme Court case provides another general summary of what constitutes an insurable interest:

"[P]recisely what interest is necessary, in order to take a policy out of the category of mere wager, has been the subject of much discussion. . . . [A]n interest of some sort in the insured life must exist. A man cannot take out insurance on the life of a total stranger, nor on that of one who is not so connected with him as to make the continuance of the life a matter of some real interest to him. . . . The essential thing is that the policy shall be obtained in good faith, and not for the purpose of speculating upon the hazard of a life in which the insured has no interest." [Connecticut Mutual Life Ins. Co. v. Shaefer, 94 U.S. 457, at 460].

Insurable Interest Of Insured In Own Life

As a matter of law, a person has an unlimited insurable interest in his own life [44 C.J.S. 900], and may name as beneficiary anyone he desires [44 C.J.S. 899]. It is presumed that he will not kill himself just to give the insurance money to others, and will not name as beneficiary someone who is likely to commit murder for the insurance proceeds. The fact that the insured himself has selected the beneficiary and has confidence in that person is considered sufficient evidence that the relations between the two eliminate any possibility of a purely speculative transaction. Of course, where the application is made by the insured in order to obtain the issuance of a policy for a beneficiary who has no interest, and who could not have obtained the policy otherwise, the legal rule requiring insurable interest applies, and the policy will be void [44 C.J.S. 901].

Does Kinship Alone Create An Insurable Interest?

Most of the difficulties with respect to the question of insurable interest apparently arise as the result of an irreconcilable conflict between the authorities in different states as to whether (1) mere kinship is enough in itself to establish an insurable interest where the relationship is so close (as in the case of husband, wife, father, mother, child, brother, sister, and so on) as to preclude any possibility of speculation on the insured life, or, on the other hand, whether (2) mere relationship is not enough in itself and must be coupled with some present or prospective pecuniary interest in the continuance of the insured life.

By way of illustration of this dichotomy of view, the Supreme Court of South Carolina held that an adult child had an insurable interest in the life of her mother, based upon the relationship alone [Holloman v. Life Ins. Co. of Va., 192 S.C. 454, 75 S.E. 2d 169 (1939)], but in a federal Appeals Court case it was held that an individual did not have an insurable interest in the life of his father [Life Insurance Clearing Co. v. O’Neill, 106. F. 800 (3rd Cir. 1901)].

Cases in various states involving the relationships of grandparent-grandchild and brother-sister have reached differing results, where the issue was whether the relationship alone was sufficient to establish an insurable interest. However, where the relationships are cousins, in-laws or uncle/aunt-neice/nephew, the overwhelming authority is that an insurable interest does not exist absent a demonstrable pecuniary interest.

Notwithstanding the existence of some authority holding mere relationship to be enough, it is probably the more general rule in force in a majority of the states that kinship, however close, is not sufficient to establish an insurable interest in and of itself [Vance on Insurance, Third Edition, p.193].

Pecuniary Interest In The Life Of A Relative

A legal right to require the services of, or support from, the insured party, or the right to receive any benefit of whatever kind, is enough to create a pecuniary interest in the life of a relative. In fact, it is not necessary that the benefits be based on a legal right, since a mere expectation of benefit to be received from the insured relative, if reasonable and based on fact, is enough under the ruling in most cases.

Thus, for example, a sister may insure the life of a brother from whom she receives or expects to receive support [Lord v. Dall, 12 Mass. 115, 7 Am. Dec. 38 (1815)]. Similarly, where an aunt and a niece lived together like mother and daughter for many years, the aunt supporting and caring for the niece, it was held that the aunt had an insurable interest in the life of the niece since she had reason to expect (in view of their relationships) that the niece would take care of her in turn in case of need [Cronin v. Vermont Life Ins. Co., 20 R.I. 570, 40 A. 497]. But where an aunt-in-law did not reside with her minor niece and had no reason to expect future aid, it was held that there was a lack of insurable interest [Liberty National Life Ins. Co. v. Weldon, 267 Ala. 171, 100 So.2d 696 (Ala. 1964)].

In a Texas case, it was held that a young man had an insurable interest in the life of his godmother, where it was established that she had indicated deep devotion to him all his life, frequently bought him clothes, and stated her intention to provide for his education [Drane v. Jefferson Standard Life Ins. Co., 139 Tex. 101, 161 S.W. 2d 1057 (Tex. Com. App. 1942)]. Because of these facts, the court concluded that the young man had a reasonable expectation of pecuniary benefits and advantages from the continuation of the godmother`s life sufficient to establish the necessary insurable interest.

Husband And Wife

In the case of husband and wife, there would seem to be no question about the right of either spouse to insure the life of the other. On the theory that mere kinship is sufficient, there could be no doubt that the closeness of the relationship of husband and wife would establish such an insurable interest. Even where mere relationship is not enough, and some pecuniary interest is required, such an interest is generally created by virtue of marital rights and obligations under state law or under common law principles [43 Am. Jur. 2d §978; see, e.g., Aetna Life v. Messier, 173 F. Supp. 90 (D.C. Pa. 1959)].

Even though a wife has an insurable interest in the life of her husband, it has been held that a policy obtained by a wife on the life of her husband without his consent or knowledge was against public policy and void [Ramey v. Carolina Life Ins. Co., 135 S.E. 2d 362 (1964)].

Once a couple is divorced the mutual insurable interest based on kinship and presumed pecuniary interest will terminate, but circumstances may exist under which one or the other ex-spouse may continue to have a pecuniary interest in the life of the other. A common example: an individual who is entitled to alimony or child support payments has an insurable interest in the life of the ex-spouse for the duration of the period that such payments are to be made [see, e.g., Gelfand v. Gelfand, 136 Cal. App. 448, 29 P.2d 271 (1934); Rio Grande National Life v. Tichenor, 69 F. Supp. 709 (D.C. Tex. 1947)].

Debtor-Creditor Relationship

A creditor has an insurable interest in his debtor`s life equal to at least the amount of the debt plus the cost of the insurance [44 C.J.S. 909]. There is a split in case law as to whether a creditor may benefit from insurance proceeds that exceed the balance owed (plus costs of the insurance) at the time of the debtor’s death.  At one end of the spectrum are situations in which the creditor takes out an insurance policy on the life of a debtor in an amount so far in excess of the debtor’s obligation (and the cost of the insurance) that the existence of the debt may be viewed as merely window dressing for what is in reality a wagering contract. In such a situation the entire contract might be considered void, even the portion equal to the legitimate debt amount [see, e.g., Lakin v. Postal Life & Casualty Ins. Co., 316 S.W. 2d 542 (Mo. 1958)].

On the other hand, if the policy, when acquired by the creditor, has a face amount which is reasonable in relationship to amount of the debt and the creditor’s anticipated costs in connection with the policy, the policy may not be considered void, but in some jurisdictions the creditor will be permitted to retain only an amount sufficient to fully retire the debt, including unpaid interest, and recoup the costs of the insurance coverage; any excess must be paid over to the debtor’s estate [see, e.g., Sachs v. U.S., 412 F.2d 357 (8th Cir. 1969), applying Missouri law].

Other cases have held that the creditor may retain such an excess, provided that the amount of insurance was reasonable in relationship to the debt and that the debtor consented to the insurance. Under such conditions it would make no difference whether the creditor acquired a new insurance policy or was named beneficiary or assignee of a policy originally owned by the debtor [see, e.g., Watson v. Massachusetts Mut. Life Ins., 140 F.2d 673 (D.C. Cir. 1943)].  Moreover, under this approach, even if the debt were fully repaid, and the debtor thereafter died while the policy was still in force, the creditor would be able to retain the full amount of the death benefit.

In the case of a corporate business, a business creditor may have an insurable interest in the life of a principal owner or officer of the corporation [see, e.g., In re Hygrade Envelope Corp., 272 F. Supp. 451 (D.C.  E.D.N.Y. 1967), rev’d on other grounds, 393 F.2d 60 (2d Cir. 1968)].

Cases have held that when the owner of real property subject to a mortgage sells the property, the holder of the mortgage may have an insurable interest in the life of the new owner, but only if the new owner actually assumes the mortgage debt [see Kincaid v. Alderson, 354 S.W. 2d 775 (Tenn. 1962); Home Building & Loan Assn. v. Hester, 99 S.E. 2d 87 (1957)]. 

For discussion of other aspects of life insurance in a debtor-creditor relationship, see material under the heading "Payment to Creditors of the Insured" in Section 20, Subdivision C.

Insurable Interest Of Assignee

If at the inception of the life insurance contract the required legal insurable interest was present, a subsequent assignment of the contract by an owner or assignee with an insurable interest to a person without an insurable interest is usually valid (unless it is part of a step transaction in which the assignor is acting merely to facilitate a gambling transaction by the assignee) [Grigsby v. Russell, 222 U.S. 149 (1911)]. This appears to be the rule followed by the courts of most states. A few states, however, seem to follow a contrary rule that an assignment to a person without an insurable interest is void as against public policy (although the assignee probably has an equitable right to recover any consideration paid, plus subsequent premiums) [Vance on Insurance, Third Edition, p. 205, 206].

Insurable Interest Of Beneficiary

Where the insured is the owner of the policy, as discussed above, anyone may be named by the insured as beneficiary, and the beneficiary need not have an insurable interest in the life of the insured. (Cases in the state of Kentucky have created an exception in certain situations where the beneficiary is paying the premiums.)

If the insurance policy is acquired by a party other than the insured and the beneficiary is a third party, as long as the owner of the policy has the requisite insurable interest, the beneficiary need not.  Two states, however, Kentucky and Texas, require that in such cases the beneficiary must have had a beneficial interest in the life of the insured as of the date of the insured’s death.

Insurable Interest In Connection With Gift Of Life Insurance Policies To Charitable Institutions

Gifts of life insurance contracts are a particularly attractive form of charitable giving; however, there is a potential issue of whether the charitable organization has, or is required to have, an insurable interest in the insured party. Charitable gifts of life insurance are discussed in detail in  Section 8, Subdivision E  including a discussion of the insurable-interest issue under the heading “Ouright Gift of a Policy to Charity.”

Tort Liability Of Insurance Company

In a case of first impression, it was held that a company has a duty to use reasonable care not to issue a policy in favor of a beneficiary who has no interest in the continuation of the insured`s life [Liberty National Life Ins. Co. v. Weldon, 267 Ala. 171, 100 So. 2d 696 (Ala. 1964)].

In this case, an aunt-in-law, who was employed as a nurse in a hospital, applied for policies of life insurance with three different companies on her deceased husband`s minor niece. The insurance totaled $6,500. In each instance, she represented herself as an aunt, either partially supporting the child or interested in the child’s future education. In one instance she submitted a false medical certificate. Some time after issuance of two policies and when the third was in the hands of an agent but not actually delivered to her, she killed the child by placing arsenic in a soft drink. She was convicted of first-degree murder and was the first white woman in the state to be punished by a death sentence.

The father of the minor child brought suit against the three companies, alleging that the aunt-in-law had no insurable interest in the insured life and that the companies knew or should have known this fact. Further, the wrongful and negligent issuance of the policies supplied the motive for the aunt-in-law to murder his minor daughter. A jury awarded $75,000 damages to the father, and the decision was sustained by the Alabama Supreme Court. In its opinion, the Court disagreed with the theory that the requirement of an insurable interest was for the protection of the insurance companies, stating that it was to protect human life. In a later case it was held that where the insured did not consent or had no knowledge of a policy`s issuance on his life, the company had a duty to the insured not to issue such policy, especially since it knew of the insured`s lack of knowledge or consent [Ramey v. Carolina Life Ins. Co., 135 S.E.2d 362 (1964)].

In the Ramey case, the insured brought suit against the insurance company to recover damages for its negligence in issuing a policy to the wife without the husband`s knowledge or consent. The husband alleged that the company knew of his lack of knowledge or consent. He also alleged that his wife had attempted to poison him, as a result of procuring the policy. On a procedural appeal, the court held that the husband`s allegations constituted a good cause of action against the insurance company.

What Party May Raise The Insurable Interest Issue?

Once a life insurance policy is issued, the traditional has been that only the insurer can raise the question of insurable interest. However, there are exceptions. Apparently, in Virginia any interested party may raise the insurable-interest question [175 A.L.R. 1279, 1283]. In Texas, where it was necessary prior to a 1953 statute, to designate a person as beneficiary who had an insurable interest, it was held that the insurer could not set up the lack of insurable interest as a defense in a suit brought by the beneficiary [175 A.L.R. 1278].

With respect to the Weldon case, discussed under the previous heading above, the father was allowed to raise the insurable-interest question in a tort action.

In another case, the IRS successfully contended that a corporate employer had no insurable interest in a truck-driver employee and taxed the death proceeds as income from a wagering contract [Atlantic Oil Co. v. Patterson, 331 F.2d 516 (5th Cir. 1964)].

Waiver And Estoppel

The authorities are in conflict as to whether the insurer may be barred by waiver or by estoppel from asserting the defense of lack of insurable interest. One theory views the requirement of insurable interest as necessary because of public policy, and without such interest the policy is void from its inception. Thus, the insurer could not waive the requirement. The other theory looks upon the requirements of insurable interest as intended primarily to protect the insurer. If the latter view is accepted, it would follow that the insurer could waive the requirement and estoppel could be used effectively to prevent the insurer from later using the requirements as a defense. Apparently, the majority of cases on the subject take the latter view [175 A.L.R. 1284].

Insurance Company Underwriting Rules

Where a person legally has an unlimited insurable interest in his own life, it would appear that he could secure an unlimited amount of life insurance and could name any person he so desired as beneficiary. In these two areas as well as others, however, insurance company underwriting rules may impose limitations.

A life insurance policy is a contract and since there is no law that requires an insurance company to enter into a contract with a prospective insured, it can set up certain standards that must be met before it assumes the risk. For example, a company ordinarily will not issue insurance on a person`s life in excess of an amount which it determines is suitable to his circumstances and means. Generally, neither will a company, at the contract`s inception, permit the insured to name as beneficiary a person who does not have an insurable interest in the life of the insured. There are, of course, many other company underwriting rules that may differ from the legal rules. The life underwriter should be able to readily distinguish the legal rules from his company`s underwriting rules in the area of insurable interest.

Summary

In view of the irreconcilable conflict in the authorities on the question of kinship and its sufficiency as an insurable interest, the fact that the decisions in a single state sometimes are not uniform, and the fact that sometimes the subject of insurable interest is covered by statutory provisions, it is difficult if not impossible to attempt any arbitrary application of the general rules discussed above. In doubtful cases, reference must be made to the statutes and decisions of the individual state in which the issue arises.

The general principles remain clear, namely: (1) where the insured takes out the policy on his own life, he can ordinarily name any beneficiary he pleases regardless of the existence or lack of an insurable interest (but subject to approval of the insurer), and (2) where someone other than the insured seeks to obtain the insurance, the party contracting for the policy must have some reasonable expectation of pecuniary benefit or advantage in the continuation of the insured`s life, or be so closely related to the insured as to create a presumed desire for the continuance of that life---or both. The prospective insured must have knowledge of or consent to the issuance of a policy on his life.

The matter of insurable interest of a corporation or other business in a key employee is discussed in Section 15, Subdivision A—Key-Executive Insurance and Incentive Plans.