In order to affect a valid insurance a person must prove some kind of interest in the life sought to be insured. This interest is called insurable interest. A person has an insurable interest in the life of another where there is a reasonable probability that he will gain by the latter’s remaining alive or lose by his death. If follows that one can have an insurable interest only when one would stand to benefit financially by the continuance of the life insured, or when in other words, one would be put to a financial loss, by the happening of the event against which the life of a person has been insured. Insurable interest is thus a financial or other lawful interest in the preservation of the life to be insured. But insurable interest is not a mere sentimental interest in the object insured. Further, mere natural love and affection is not sufficient to constitute an insurable interest.
In the case of life insurance insurable interest must be present at the time when the policy is taken. It may or may not be in existence at the time of the death of the person whose life is insured. In the following three cases, insurable interest is presumed and no proof is required – namely
i) On life
ii) Husband in the life of wife and
iii) Wife in the life husband
In all other cases insurable interest has to be proved.
The following have been held to have an insurable interest:
1) A child has an insurable interest in the life of his father.
2) A creditor has an insurable interest in the life of the debtor to the extent of the debt.
3) A surety has an insurable interest in the life of his principal debtor.
4) A partner in business has an insurable interest in the life or lives of his co-partners.
5) A servant employed for a specified period has an insurable interest in the life of his employer.
In the following cases, there is considered to be no insurable interest.
1. A father has no insurable interest in the life of his son except where he is dependent on him.
2. An elder brother has no insurable interest in the life of his younger brother.
3. An uncle has no insurable interest in the life of his nephew.