LIFE insurance refers to an insurance on human life, or an incident related to it, such as injuries or permanent disability. A person may obtain a life insurance policy for his own life. He may also take one for the life of another individual. The question now is, can it be any other person?
Consider the following situations: 1) a father obtains an insurance for the life of his child; 2) a spouse gets one for each other; 3) a son obtains an insurance for the life of his parents; 4) a student insures the life of a family friend who pays for his education or is supporting him; 5) a company purchases a group insurance for its officers; and 6) a mortgagor obtains an insurance in favor of the mortgagee as a security for the payment of a loan.
To provide some clarity on this issue, let us begin by examining the concept of ‘insurable interest,’ which is an important requirement in an insurance contract, without which such policy is considered unenforceable. In other words, claims from a policy lacking an ‘insurable interest’ will be denied.
In life insurance, a person has an ‘insurable interest’ in the life of another if he or she is concerned and directly affected by the continuance of the life of that other person (the insured), at least at the time the insurance is effected.
This is to prevent any dishonest or evil acts that can immediately cause a fatal event to get the financial benefits provided for in the life insurance policy.
Such acts are against public policy and are equated to gambling against the life of another person or desiring to gain some money in exchange for the death of another. Hence, the law requires that a person should have an ‘insurable interest’ in the life of another to protect the insuring public from such wickedness.
There are two classes of insurable interest in life insurance. These are (a) insurable interest in the insured’s own life, and (b) insurable interest in the life of another person. In the second class, the owner of the insurance policy is different from the “subject” of the insurance, or the person whose life is insured. In this case, the owner of the policy may be the beneficiary or the beneficiary may be another person.
The second class of ‘insurable interest’ may be based on blood relationship, business relationship, or other pecuniary or financial interest.
In the examples provided earlier, purchasing a life insurance for another person with an ‘insurable interest’ based on blood relations pertains to the first and second situations. These types of life insurance policies are valid. In these cases, the natural affection and moral forces which readily prompts a parent or a spouse to serve and protect his or her child or the other spouse guarantee against the danger of voluntarily taking the life of the insured to get the insurance policy benefits.
However, if the “subject” of insurance is the policy owner’s brother, sister, parent, or other relatives aside from the child and spouse, there is no valid ‘insurable interest’ based on blood relationship but pecuniary interest. The policy owner has an insurable interest on their life because they are legally obligated to give support to each other under the Family Code. This falls under our third situation.
There could be an ‘insurable interest’ when the owner of the policy has a financial or monetary interest in the person whose life is being insured. This can include non-child or non-spouse relatives, friends, or other persons who support or provide for the education of the policy owner.
The law allows this type of ‘insurable interest’ because the policy owner has direct material advantage in the continuation of life of the person being insured, either a generous friend financing the medical needs of the policy owner or an uncle paying for his tuition every semester, or the person whom he or she depends on financially. These are examples of the fourth situation.
For the fifth situation, a company taking out life insurance policies for its officers and employees has an ‘insurable interest’ because it will benefit from the preservation of their lives, and in the same way, will suffer economic losses if they perish or be permanently injured disallowing them to perform their tasks in the company.
Interestingly, life insurance may also be taken out by a person who lent money over the life of the borrower, but not vice versa, because the creditor is interested in prolonging the life of the debtor so the latter can deliver the promised obligation. Similarly, in a mortgage transaction, the debtor’s life may be insured through a “mortgage redemption insurance,” a group life insurance which protects both the mortgagee (the lender) and the mortgagor (borrower). This mortgage redemption insurance contract must contain a ‘loss payable mortgage clause.’
Upon the death of the mortgagor during the subsistence of a mortgage contract, the money from the insurance will be used to pay for the mortgage debt, which removes the burden on the heirs of the deceased mortgagor. This is a clear case of the sixth situation.
Lastly, a person who is about to inherit a fortune may also take out an insurance on the life of the administrator of the estate to be inherited by the policy owner.