The Insurable Interest Clause in Life Insurance

Life insurance is essentially a contract between an insurer and an insurance holder, in which the insurer promises to pay out a designated beneficiary an amount of cash upon the insured person’s death. Depending on the contract, beneficiaries can be anyone-even employees, former spouses or anyone who has been loyal and faithful to the insured. In some cases, beneficiaries may be family members who have continued to care for the insured through good times or bad.

Another popular form of life insurance is term life insurance. Here, as opposed to paying premiums on a specified period of time, the premium is paid only until the end of the insured’s lifetime. In this case, there are usually no set beneficiaries; it is up to the insurance provider or insurer to decide who among its many named beneficiaries will receive the payout when the insured dies. Some examples of common term life insurance contracts are variable life policies, universal life policies and whole life policies.

Another type of life insurance policy is variable universal life (VUL) insurance. As its name implies, it allows the flexibility to adjust the face value of the contract while it is in effect. If the insured dies, the contract is made whole, regardless of whether the proceeds are paid out or not. In this case, it is possible for the insurance company to replace the cash surrender value with more money.

Whole life insurance policies provide a single cash death benefit. The contract may also allow the insured to change the beneficiary if he or she should die. Usually, once the insured passes away, his family is given the option of choosing someone else as beneficiary. Alternately, the insured may sell his policy to another insured individual or trust, in which case the cash surrender value is paid to the person designated as the beneficiary. Once the insured passes away, his estate receives the entire premium amount minus the surrender value. Should the beneficiary choose not to receive all of the premium payment or if the insured should die during the contract period, the remaining balance of the premium is then paid by the insured to the estate.

A variation on the whole life insurance policy is the convertible life insurance policy. As the name implies, the face value of the policy can be converted from one type to another. In this case, the premium payments are returned to the company if the insured should pass away during the contracted time period. Should the insured die during that period, the premiums are paid to the insurer. Once again, if the insured should pass away the policy would be terminated. However, it is important to note that once the premium payments have been made, the company may not revert to the option to convert.

When an individual purchases a life insurance policy, he generally agrees to an insurable interest clause, which states that in the event that the insured dies, the insurer will be required to pay the cost of an agreed upon amount of premium payments. Some forms of policies are also written specifically with the term “insurable” in them. These are often used in conjunction with a “springing retirement clause.” This clause states that after the policy has been in effect for a specified amount of time and the insured has passed away, the premium payments will cease and the insurer will be required to settle the claim. Should the insured pass away within the specified time period, the insurer must pay the claim without having to resort to the option of converting the policy.