There are many concepts that are basic to life insurance.
One such concept is that of ‘Insurable interest’. Let us discuss the concept
with the help of a real life example.
Yusuf1, who was working in Saudi Arabia
Now, what does that mean? Simply understood, the death of
the boy would not put Yusuf in any financial loss; rather, the death of the boy
would bring a monetary gain to Yusuf (through his wife). Therefore, legally
speaking, Yusuf did not have any ‘positive interest’ in the survival of the
boy.
Let us assume a different situation. Yusuf used to extend
financial support to his younger brother doing research work in the University.
His brother proposed insurance on Yusuf’s life. Here death of Yusuf would put
the brother in loss of income. So he has
a ‘positive interest’ in the continued survival of Yusuf.
Such ‘positive interest’
in the continued survival of the person insured on account of a pecuniary
interest is called insurable interest. Neither the insured nor the insurer
wants the death of the insured to happen.
When the interest is not positive, we refer to it as the
presence of ‘moral hazard.’ Moral hazard is a situation where death of the
insured person is preferred, as it could provide monetary gain to the nominee
or the purchaser of insurance. Yusuf’s proposal fell under this category.
Obviously, insurance cover was refused. Life insurance sans insurable interest
makes it gambling and hence illegal.
An employer is said to have
insurable interest in the life of his employee, a creditor has insurable
interest in the life of his debtor and a married person has insurable interest
in the life of the spouse. A company
has an insurable interest in the life of its key employee who directly
contributes to the Company's progress and profit. In case of relationships other than that of
husband and wife, insurable interest is not to be presumed from the mere
existence of relationship. The pecuniary interest must be proved.
In all the above situations, death
of the insured would result in monetary loss for the person who proposed
insurance. Insurance cover could be to the extent of this loss, beyond which it
would fall under the category of moral hazard. Take an example. A, a municipal
worker with a salary of Rs.4000 per month goes for an insurance cover of Rs one
crore. The annual income to the family he brings in is an amount of Rs.48,
000/- (4000 x 12 = 48, 000). If he dies his family would get an insurance claim
of Rs one crore, which may fetch them an interest income of Rs.5 lakh per year,
assuming bank deposit interest rate as 5%.
This is a situation where death of the municipal worker is monetarily
more desirable to the family (moral hazard). So our life insurance companies do
not offer such high cover, disproportionate to his income, to the worker, in his own interest. The life cover
our life insurers offer him would be such that the income from the claim only
compensates the financial loss the family would suffer consequent on his death
(insurable interest).
An individual has unlimited
insurable interest on his own life. However, death should not make anyone
richer. Therefore an individual’s life insurance cover is limited to the
probable monetary loss that might befall his dependents on his death. In a
policy devoid of life cover, that is, one purely for the purpose of savings or
for
securing an annuity, death of the
assured does not bring in compensation and as such the insurable interest may
not be insisted upon.
1. Name changed 2. Nominee is the person to whom moneys will be paid by the insurer in
the event of death of the life assured during the term of the policy 3.Underwriter is the official of the insurance company doing assessment
of risk on the life that seeks
life insurance cover and deciding whether or not to grant insurance cover and
if granted on what premium and conditions.
Key words:
Insurable interest
Positive interest
Pecuniary interest
Moral hazard
Key words:
Insurable interest
Positive interest
Pecuniary interest
Moral hazard
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