My son ran into one of his old high school friends the other day. When I asked him what he was doing, he said he was working and going to school part time. You see, when he graduated from high school his parents basically kicked him out the door and said, “You are on your own.” This was typical years ago, but not so much today. I have commiserated with friends that still have adult children living at home. One friend described it as a “failure to launch”. Perhaps it’s our fault as parents. Perhaps it’s the economy. Whatever it is, some of these parents want to purchase life insurance on their adult children. The question becomes, “Is there an insurable interest?”
First, let us fully understand “Insurable Interest”. Insurable interest is present when an individual gets a financial or other type of benefit that is based upon the continuous existence of the insured. Therefore, a person has an insurable interest in something or someone when the loss of the insured would cause the person to suffer a financial or other type of hardship or loss.
Having an insurable interest refers to the fact that a policy owner must establish that he or she actually has a financial interest in the person or property that is being insured. The policy owner must face the possibility of a personal risk or loss, and have a legitimate financial interest in preserving the life or property that is being insured. In addition, the insurance coverage that is being applied for should not constitute a personal gain for the policy owner or beneficiary.
Let’s look at some examples where there are adult children involved:
- Mom wants to purchase a life insurance policy on her daughter for the protection of the daughter’s children. She loves her grandchildren and wants to make sure they are taken care of. The daughter is in her 30s with an income, a spouse with an income, and they live in her own home. Mom completes the application with herself as the owner, premium payer and beneficiary on the policy on her daughter’s life. The insurance company denied coverage because there is no insurable interest of financial loss to the mom. Could we argue that mom may have a financial loss if the daughter died, helping to pay for college and living expenses, perhaps, but whose responsibility is that, really?
- A loving family has 2 kids in their 20s still living at home. One of the kids has a job, the other does not. The kids did not go to college, so there is no debt involved. Their parents wanted to take out a life insurance policy on the kids, with them (the parents) being the owners, premium payers and beneficiaries. The insurance company denied coverage based on insurable interest. These are adult children and the insurance company saw no financial need to have the coverage on the children. The kids just need to get jobs and get out on their own (my opinion)!
- Proud parents of their daughter who just graduated from college wanted to buy a life insurance policy on her life. She moved back home after completing college but has yet to find a job. She does have college loans that will need to be repaid. The insurance company approved coverage on her life with the parents being the owners of the policy because of the outstanding loans they would be responsible for, this being the insurable interest.
So, just because a parent loves their children doesn’t mean there is an insurable interest in their lives. If it is questionable, contact us and let’s discuss your case. Make sure before the application goes to the carrier and your case is declined due to insurable interest.