Insurable interest means the person buying insurance would suffer a real loss if the insured person or property were harmed. Without it, a policy is a wager, and courts treat a life policy issued without insurable interest as void from the start. The requirement keeps insurance tied to genuine loss and removes the incentive to cause one.

Who has an insurable interest

• Your own life – always.
• Close family – spouses and other close relatives you depend on.
• Business relationships – partners, key employees, and a business's owners for buy-sell purposes.
• Creditors – in a debtor's life, but only up to the amount of the debt.
• Property – owners and others with a financial stake, such as a mortgage lender.

When it must exist

• Life insurance – when the policy is issued. It need not still exist when the insured dies; a policy on a former spouse or former business partner remains valid.
• Property insurance – generally at the time of the loss.

Consent and STOLI

When an adult applies for life insurance on another adult, insurable interest statutes generally require the insured's knowledge and written consent (for example, N.Y. Ins. Law 3205), with exceptions such as a parent insuring a minor child. Stranger-originated life insurance (STOLI), in which investors with no insurable interest arrange a policy to acquire it later, violates these laws.

A simple example

A business buys a policy on its sales manager as key person coverage. Two years later the manager leaves and the business keeps the policy. When the former manager dies, the business is paid: insurable interest existed when the policy was issued.

Don't confuse it with…

• Insurable interest is about the buyer's stake, not who is named beneficiary.
• The incontestable clause doesn't save a life policy that lacked insurable interest at issue.

On the exam

Memorize the timing: life = at issue; property = at the time of loss. Know who has an insurable interest, that a creditor's interest is limited to the debt, and that adult insureds generally must consent.