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Insurable interest

An article over at probpublica.org just caught my eye: http://www.propublica.org/article/death-takes-a-policy-how-a-lawyer-exploited-the-fine-print

It’s an American story. Basically a lawyer found a way to screw life insurance companies by avoiding what is known as ‘insurable interest’. The idea is that in order for me to buy life insurance on your life, I need to suffer a financial loss upon your death.

While the idea of a lawyer making out like a bandit from an insurance company technical loophole may sound exciting, it’s anything but. The reality is, the concept of insurable interest serves to protect consumers, not just life insurance companies.

Consider what happens if this restriction is removed. I can now purchase life insurance on anyone. I can purchase life insurance on my neighbour. I can purchase life insurance on my ex-spouse (if I had an ex-spouse). I can purchase life insurance on estranged family members. I can purchase life insurance on my employees. Heck, I can purchase life insurance on you!

Does the idea of a stranger purchasing life insurance on your life make you a bit queasy? It should. A stranger has no financial loss upon your death. By purchasing life insurance on you they’re not ‘insuring’. Instead they’re profiting upon the probability of the event of your death. This is no longer life insurance, it’s now a lottery, with your death as the trigger for the winning. You die, the policyholder wins.

In the U.S., Walmart has in the past done something similiar with what’s known as COLI – corporate owned life insurance. They’ve purchased $50,000 life insurance policies on their frontline employees – cashiers, greeters, and similiar. Does Walmart lose $50,000 if their greeter passes away? If you think that perhaps that’s stretching it, then you’ll see how it then becomes in Walmart’s best financial interest for the employee’s bad cough to turn into pneumonia and then die. Not a lot of motivation in that case to provide strong medical benefits I think.

In short, removing insurable interest creates a situation where people have a motivation for you to be dead – they profit from it. This is not a situation we want to encourage.

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