There are legitimate reasons to taking out cover on someone else’s life. Since life cover is financial protection against the loss of a life, having insurable interest involves proving how the loss of their life will financially impact your life.
At first glance, taking out life cover on someone else’s life may sound like the start of a thriller movie – that is, right before the main character mysteriously disappears.
However, there are legitimate reasons to taking out cover on someone else’s life. Besides having their consent to do so, you need to prove insurable interest.
Since life cover is financial protection against the loss of a life, having insurable interest involves proving how the loss of their life will financially impact your life.
The following are the most common situations in which people decide to take out life cover on someone else’s life.
1. Taking out a policy for your spouse (or partner)
If you take out life cover on your own life and make your spouse the beneficiary, then your spouse will be financially covered if something were to happen to you.
At the same time, you can also take out life cover on your spouse’s life and make yourself the beneficiary.
You would be able to prove insurable interest because your partner’s death would mean the loss of half of your household income.
2. Covering your children
If your child passes away, you will be grief-stricken and struggle to perform at work. But this does not mean you have an insurable interest on your child’s life.
However, if you live with your adult child, you can claim insurable interest because you would have to incur the cost of moving to a new home and paying rent or a new mortgage.
3. Protection against the loss of a parent
Although you might be financially independent from your parents, or even supporting them yourself, it’s still possible to prove insurable interest.
Their loss might leave you with a new financial burden.
For example, your parents may take care of your children while you are at work and, if they were no longer around, you would have to hire someone to take over this duty.
4. Covering your business partner
Starting a business comes with financial risks, including the risk of your business partner suddenly passing away.
It is common practice for business partners to take out life cover on each other’s lives to ensure they can buy out the other half of their business if one of them dies.
This is because they may not have enough disposable savings to do this at the time, and they may end up in business with their business partner’s spouse or children.
5. Taking care of your godchildren and flatmates
Some godparents take out life cover for the parents of their godchildren so that they can be financially prepared to take care of them if tragedy strikes.
Co-home owners can also argue insurable interest, because one would be liable to taking over the full mortgage payments if something were to happen to the other.