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
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
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 (
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
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,
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
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.