Insurable interest means that the person who is purchasing the policy has more to lose than to gain by insured’s death and therefore may purchase a life insurance contract on somebody else’s life. This is intended to prevent a person purchasing a policy unknowingly on another person for purposes of wagering, planned murder, or any other reason.
An individual is deemed to have unlimited insurable interest in themselves and can purchase as much life insurance as they want (with no state restrictions), subject to the willingness of insurance companies to issue an applied-for amount of coverage. Otherwise, it is any instance where the insured carries an economic responsibility to a beneficiary.
Insurable interest is typically only required at the inception of the policy. After that, most states will allow that the beneficiary can be changed or the policy assigned without regard to insurable interest.
Recently there are concerns regarding questionable uses of life insurance, and insurable interest has become a hot topic. Life insurance up until recently has been used for the long-accepted purpose of providing a beneficiary with a sum of money to replace some type of income loss. The usual needs on the personal side covered income protection for the family, mortgage, etc., and could be used to pre-fund a potential estate-tax liability. Other uses were for business purposes such as key-person indemnification and buy-sell funding.