What is Insurable Interest?

With so many different types of insurance policies existing, it is hard to think of something that you can’t insure. You can insure your home, car, motorcycle, boat, belongings, and even your life. But can you insure your neighbor’s car? Surprisingly the answer is no. You can only insure the items that you have an insurable interest in.

So what is insurable interest? Insurable interest means that the destruction of the property or the death of the person insured would cause you to take a direct financial loss. You can’t insure your neighbor’s car, because you would not suffer a financial loss over it being totaled. You also can’t insured your barely known distant relative with life insurance since their passing isn’t going to directly impact your personal finances. You can insure the home & car, and belongings in your name as if they are destroyed or damaged, you will be directly responsible for repairing or replacing them. There can also be life insurance on your spouse that you can benefit from as their untimely death would create financial hardship for your family.

Insurable interest is required so that you only benefit from insurance payouts for losses that would actually affect you financially. Insurance companies often require you to have insurable interest when you start the policy on the person or object and insurable interest at the time of the loss. For example:  you owned a car and added it to your auto insurance policy, but later you sold it to your cousin. Let’s say that cousin then had an accident. Your insurance would not cover this vehicle even if you still have it listed on your policy as now it belongs to your cousin. It is your cousin who would take the financial loss, not you.

Sometimes, with families, friends, and romantically involved parties, this can be complicated. Insurance policies have listed named insureds for the policy and these named insureds are the ones that receive the funds. Usually named insureds are an individual or an individual & spouse combo.

So can you insure your child’s vehicle? If a child owns a vehicle in their name, is paying the payments on the vehicle, would suffer the damage to their credit if they don’t pay, but insure it on their parent’s auto policy, the parents receive the funds for the totaling of the vehicle.  So it is better in this scenario for the child to insure their own vehicle on their own policy as they have the insurable interest and should receive the funds vehicle in a claim. Sometimes insurance companies will allow for a child/parent co-owned vehicle to be insured on a policy in either the parent’s or the child’s name. This makes it so that the loss funds can be put in both names.

 

In the case of romantic relationships and friendships, insurance companies sometimes do not want to insure something owned by two unrelated individuals. If they start a policy together, but part ways, how does an insurance company decide to whom the funds belong? Insuring married couples is safer as if they split, lawyers help decide to whom funds and property belong. This will vary from company to company following their rules about how they will insure co-owned items or items owned individually insured on a co-owned policy.

The best idea is to ask your insurance agent before you buy anything co-owned or buy something and expect to be able to insure it on someone else’s policy.  To make sure that you will receive the funds for the loss, make sure to insure everything correctly. Provide your agent with your proof of purchase for an item showing who has ownership and let them know if you transferred ownership to someone else. For life insurance policies, make sure all of the beneficiaries are kept up to date. This way you know in the case of a claim, the correct people (you including) receive the benefit of the insurance you are paying for!