# Insurable Interest Explained: Definition, Importance, and Examples

![Insurable Interest: An economic stake in something that if damaged, destroyed, or lost would result in financial hardship.](https://www.investopedia.com/thmb/ZyRU9o8FLBEwW1OHh6q25B9PbsI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/InsurableInterest-c55175ec7272432d9e06c350a1e7fd21.jpg)

*— Xiaojie Liu / Investopedia*

> **Definition**
>
> Insurable interest is a financial share in an event, item, or person that would result in monetary deprivation if destruction, harm, or loss occurred.

## What Is Insurable Interest?

Insurable interest is an investment that protects against financial loss. A person or entity has an insurable interest in an item, event, or action when the damage or loss of the object would cause a financial loss or other hardships.

To have an insurable interest, a person or entity would take out an [insurance](https://www.investopedia.com/terms/i/insurance.asp) policy protecting the person, item, or event in question. For example, a homeowner has an insurable interest in their own house, but they cannot insure a neighbor's house. An insurance policy helps mitigate the loss to the insured party if the asset is somehow damaged.

Insurable interest is crucial for issuing a valid insurance policy, protecting against intentional harm. People not subject to financial loss don’t have an insurable interest. Therefore, a person or entity can’t purchase an insurance policy to cover themselves if they are not actually subject to the risk of financial loss.

### Key Takeaways

*   Insurable interest is a requirement for legal and valid insurance policies, ensuring coverage only for entities at risk of financial loss.  
    
*   Insurable interest applies when losing an insured item or person would cause financial hardship for the policyholder.  
    
*   Insurance policies should cover potential losses rather than rewarding individuals, aligning with the principle of indemnity.  
    
*   Purchasing insurance on unrelated parties without insurable interest can create moral hazards, which are unethical and prohibited.

## How Insurable Interest Determines Insurance Policies

Insurance is a method of pooled [risk exposure that protects policyholders from financial losses](https://www.investopedia.com/terms/f/financial-exposure.asp). Insurers have created many tools to cover losses related to various factors such as automobile expenses, [healthcare](https://www.investopedia.com/terms/h/healthinsurance.asp) expenses, loss of income through [disability](https://www.investopedia.com/terms/d/disability-insurance.asp), loss of life, and damage to property.

Insurable interest specifically applies to people or entities where there is a reasonable assumption of longevity or sustainability, barring any unforeseen adverse events. Insurable interest insures against the prospect of a loss to this person or entity. For example, a corporation might have an insurable interest in its [chief executive officer (CEO)](https://www.investopedia.com/terms/c/ceo.asp), and a football team in its star quarterback. Further, a business may have an insurable interest in its [C-suite](https://www.investopedia.com/terms/c/c-suite.asp) officers but not its average employees.

## Why Property Insurable Interest Matters in Homeowners Insurance

[Homeowners insurance](https://www.investopedia.com/insurance/homeowners-insurance-guide/) compensates policyholders for significant financial loss if their home is destroyed by fire or other disasters. The homeowner has an insurable interest in the property; losing that home would create a catastrophic loss for the policyholder. It is reasonable for the homeowner to expect longevity regarding the ownership of the house. The homeowner insures against unforeseeable damage.

Policyholders can insure their own home, but not a neighbor's house. Purchasing [homeowners insurance](https://www.investopedia.com/terms/h/homeowners-insurance.asp) for a neighbor’s house creates an incentive to cause damage to that house and collect the insurance proceeds. Proper [underwriting](https://www.investopedia.com/terms/u/underwriting.asp) helps avoid [moral hazards](https://www.investopedia.com/terms/m/moralhazard.asp), where parties might be tempted to cause a loss.

## Connecting Indemnity Principles With Insurable Interest

The [indemnification principle](https://www.investopedia.com/terms/i/indemnity.asp) states that insurance should cover losses without rewarding or penalizing policyholders. Indemnification suggests that insurers should design policies to cover the value of the at-risk asset appropriately. Poorly conceived or designed policies create a moral hazard, which increases the costs to insurance companies and drives premiums to unsustainable levels for policyholders.

## Real-Life Scenarios Illustrating Insurable Interest

Insurable interest is also necessary in [life insurance](https://www.investopedia.com/life-insurance-4427715), though this has not always been the case. There are cases where people have purchased life insurance policies for elderly acquaintances strictly because they expect that person’s imminent death. Life insurance regulations have evolved to require a relationship in which the policy owner will suffer a financial loss in the event of the insured’s death. Hardship may include immediate family members, more distant blood relatives, romantic partners, creditors, and business associates. The face value of life insurance policies must not exceed the human life value of the insured; otherwise, the indemnity principle would be violated, creating a moral hazard.

Also, a policy may not be written without the knowledge of the insured person. This was the case in September 2018, when a California couple was accused of committing three counts of [insurance fraud](https://www.investopedia.com/terms/i/insurance-fraud.asp) in order to receive $1 million in [life insurance](https://www.investopedia.com/terms/l/lifeinsurance.asp) benefits. Husband and wife Peter and Jin Kim purchased life insurance on one of Mr. Kim’s clients and listed Mrs. Kim as the client’s [beneficiary](https://www.investopedia.com/terms/b/beneficiary.asp) niece. On a second policy, Mrs. Kim appeared as the sister of the policyholder. Mr. Kim, a licensed [insurance agent](https://www.investopedia.com/articles/financial-careers/08/become-insurance-agent.asp), also did not inform the company that the client had a diagnosed terminal illness when he submitted the applications.

## Is Insurable Interest Required for Insurance Policies?

Yes. Insurable interest is, essentially, proof that an individual or entity would experience financial or other hardships as the result of damage to or loss of an item or person. This is evaluated during the underwriting process to ensure this direct link. Such proof of insurable interest is required for all insurance policies.

## What Is Moral Hazard?

A moral hazard is when someone with an insurance policy is incentivized to cause loss or damage in order to collect on the insurance. For instance, somebody who is terminally ill may seek a life insurance policy knowing it will pay out when they pass away soon after acquiring it. Having insurable interest helps minimize moral hazard.

## Why Can’t I Take Out a Life Insurance Policy on Just Anybody?

Unless you have insurable interest, you can’t take out a life insurance policy on that individual. If so, you could essentially place bets on, or else profit from, the death of otherwise random individuals. Family members and dependents are often justifiable as having insurable interest. So are business partners, borrowers, and key employees in certain cases.

> **Article Sources**
>
> 1.  The Association of British Insurers. “[Insurable Interest](https://www.abi.org.uk/data-and-resources/tools-and-resources/glossary/insurable-interest/).”
>     
> 2.  New York State Department of Financial Services. “[RE: Homeowners Insurance/Insurable Interest](https://www.dfs.ny.gov/insurance/ogco2007/rg071207.htm).”
>     
> 3.  Cornell Law School, Legal Information Institute. “[Indemnify](https://www.law.cornell.edu/wex/indemnify).”
>     
> 4.  Federal Deposit Insurance Corp., via Internet Archive Wayback Machine. “[Options For Addressing Moral Hazard](https://web.archive.org/web/20240522153008/https://www.fdic.gov/deposit/deposits/international/guidance/moralhazard.pdf).”
>     
> 5.  Fidelity Life. “[What Is an Insurable Interest in Life Insurance?](https://fidelitylife.com/learn-and-plan/insights/what-is-an-insurable-interest-in-life-insurance/#:~:text=%E2%80%9CInsurable%20interest%E2%80%9D%20means%2C%20in,interest%20in%20the%20insured%20person.)”
>     
> 6.  Los Angeles Times. “[La Cañada Husband And Wife Accused of Fraudulently Collecting $1 Million in Life Insurance](https://www.latimes.com/socal/la-canada-valley-sun/news/tn-vsl-me-insurance-fraud-arrest-20180926-story.html).”