Have you ever tried to name your partner as your beneficiary on a life insurance policy only to be told that you have to prove an "insurable interest," or even that youre not allowed to name someone who is not a relative? If an insurance agent or company questions you or gives you a hard time about listing your partner as your beneficiary, its possible that you are experiencing discrimination.
"Insurable interest" is a frequently misunderstood concept. Many people mistakenly think it refers to the relationship between the insured and the beneficiary; rather it involves the relationship between the insured and the policy owner.
Heres a relatively non-technical explanation. In addition to the insurance company, there are three parties to a life insurance contract - the owner, the insured and the beneficiary. The owner is the person (or organization) applying for the policy, who also controls the cash value, names the beneficiary and is responsible for the premium. If the owner and the insured are not the same entity, the insurable interest question is a legitimate one. An example would be if your employer takes out a "key person" policy on your life because you are a valuable employee with unique skills and knowledge. It would be a loss to the business if something happened to you and expensive to recruit someone to replace you. The company owns the policy, is responsible for the premium and would get the money if you died. (You have to agree to be insured. They cant get the policy without your permission.) Clearly, the employer has an insurable interest in your life in this situation because the business would suffer a financial loss if you died.
The insurable interest rule exists to prevent someone from profiting when the death of someone else would not cause them any financial loss. This is considered to be not in the public interest.
If you are taking out a policy on your life, however, you are both the insured and the owner of the policy. You are automatically assumed to have an unlimited insurable interest in your own life, even if no one would suffer a financial loss if you died. You have complete control of the beneficiary designation. Theoretically, there is no limit to the amount of life insurance you can take out on yourself if you can afford the premium and meet the medical guidelines. Although, if youre applying for an unusually large amount relative to your income, the insurance company may worry that you know something they dont. A common rule-of-thumb is that up to five times your annual income is acceptable. Upon purchasing the policy, you can name anyone you want as beneficiary and you dont have to prove that they have an insurable interest.
In domestic situations, if you own the policy on your life and want to name your partner as beneficiary, the question of insurable interest should never arise. If the insurance agent tells you the beneficiary has to have an insurable interest in your life, be suspicious. You may wish to switch to a more knowledgeable insurance agent. If you cant do that (for example, if its employer-provided group coverage), here is a solution.
Meet with an attorney to do estate planning and set up a revocable living trust. In the trust, you have complete freedom to name anyone you want to inherit your estate, which includes your life insurance proceeds. When you apply for the insurance name the trust as beneficiary. If you already have life insurance, do a change of beneficiary after the trust documents are signed. Have your attorney prepare a "Certificate of Trust" if you need a document to show the insurance company. (It wont say who the real beneficiary is.) Revocable trusts are common estate planning tools and no one, not your insurance agent, your insurance company, your bank or your employer, will question a trust as beneficiary. If you change your mind about who you want to get the money, you amend the trust, not the insurance policy. Your privacy is protected and there may never be any questions about insurable interest.
There are several other good reasons to have a revocable living trust, of course, including avoiding probate. Discuss this with your attorney and financial advisor.
Valerie Meisel lives in Wilmington, Delaware, where she is a Personal Financial Advisor in the Advanced Planner Group of American Express Financial Advisors, Inc. Valerie may be reached at 800-220-2190 ext. 226.
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5/16/97 Issue. Copyright 1997 by CAMP Rehoboth, Inc. All rights reserved.