Insurable interest means having a financial stake in a person, a home, or a piece of personal property to the extent that if you were to suffer a loss, you’d stand to lose… a lot. It has a slightly different meaning depending on whether we’re talking about renters, homeowners, or life insurance.
What is insurable interest?
Think about your clothes. You bought them, you own them, and if something happened to them, you would probably face a financial loss. For this reason, you have an “insurable interest” in your clothes.
Now, think about your business partner. You both invested in your small business venture. If you were to unexpectedly pass away, they’d be on the hook for shouldering the financial burden of getting your big idea off the ground. And, let’s be honest, chances are your death would put the breaks on the project, making it unlikely that your business partner would ever get a return on their investment. Your business partner has some financial dependency, and therefore, “insurable interest”, in you.
Now, let’s look at the bigger picture.
In general, you have an insurable interest in someone or something, if you would suffer an economic loss if the person were no longer around, or if the item were damaged or destroyed.
Not only that, but you’d also receive some benefit from this person or item’s continued existence. And for this reason, you’d probably want to get insurance coverage to protect the people who count on you financially, or coverage to get your item replaced or repaired, so you can avoid a financial loss. When insuring your home or your personal property, you’re also maintaining some sort of proof that you owned this item.
Insurable interest in life insurance
Someone who has insurable interest in the context of life insurance, is financially tied or dependent on the policyholder, so they would suffer a financial loss as the direct result of their death.
When applying for life insurance, a policyholder is required to name a beneficiary that has insurable interest in the life of the insured person.
For example, with Lemonade’s term life offering, you can select a family member, current or former spouse, domestic partner, or business partner as your beneficiary—meaning that those people could potentially receive an insurance benefit payout, also called a death benefit, if you were to die during a predetermined period of time, or term. Lemonade offers death benefits $50,000 to 1,500,000, which could help cushion the financial blow of your loss on those closest to you.
It is reasonable that those with close business or family relationships would suffer some sort of financial loss in the event of your death, which is why you can select these individuals as beneficiaries. With policies offered by Lemonade Life, however, you cannot name your barista, kindergarten teacher, or surf instructor as the beneficiary in your policy.
Insurable interest in renters insurance
If you have renters insurance, your policy covers the things you have an insurable interest in, aka your personal property (think: phone, laptop, TV, etc) and if your things were damaged or stolen, you’d suffer a financial loss (and you’d miss out on using them).
Pro tip: If they are expensive and have some kind of warranty on them, you’d probably want to keep a record of the purchase as well—since lack of proof of ownership can really slow down any claim you may have!
But the thing is, renters insurance doesn’t cover the structure of your apartment building. Why’s that? Because technically, you don’t have a financial stake in your building, just in your stuff.
Your landlord is the one with the insurable interest in this situation.
That’s why damage to your apartment walls and the structure of your building would be covered under your landlord’s insurance – if either of these things were somehow destroyed or damaged, it would cause your landlord a financial loss, not you.
Insurable interest in homeowners insurance
Quiz: What’s one of the main differences between renters and homeowners insurance?
Answer: Homeowners insurance covers your stuff and your home. So if a peril damages your home itself (aka “the structure”), it’d be covered under your homeowners insurance policy.
Why? Well, turns out your home is an insurable interest to you, because you’d suffer a financial loss if something happened to it (and you benefit from the fact that it still exists).
The law of insurable interest
In fact, when it comes to home insurance, there’s a “law of insurable interest.” That means you can only get paid by an insurance company for damage to a home that you have an insurable interest in. The point of this law is to protect against fraud and dishonesty.
For this reason, you’re not allowed to buy homeowners insurance for a random property, say your neighbor’s house. You have no insurable interest in it, because it’s owned by somebody else.
This rule is put in place to avoid any situations where someone would have a reason to damage somebody else’s house so they can collect money from the insurance company—which admittedly sounds like the plot to a really bad movie.