Life insurance can be a critical part of a person’s financial plan, serving as a safeguard against the financial consequences of death. However, it is not always straightforward who you are legally permitted to insure. In South Africa, the common law principle of insurable interest plays a central role in determining whether you may lawfully take out a life insurance policy on another person’s life. While insurers have some flexibility when it comes to underwriting, the presence of insurable interest is a legal requirement at the inception of a policy—and failing to meet this requirement can result in claims being repudiated or policies declared void.
In this article, we unpack what insurable interest means, when it must exist, who qualifies, and what policyholders should be aware of when considering cover on the life of someone other than themselves.
What is insurable interest?
Insurable interest is a legal and contractual requirement that ensures a person taking out life insurance on another individual stands to suffer a genuine financial or emotional loss should that person die – although keep in mind that emotional loss alone is not always sufficient unless accompanied by financial implications. It exists to prevent speculative insurance or so-called “wagering contracts”, which would otherwise allow someone to benefit financially from the death of a person with whom they have no legitimate relationship.
In South African law, insurable interest is typically established where there is a recognised familial, financial, or legal relationship between the policyholder and the life assured. The underlying principle is that the policyholder would experience a measurable disadvantage—financial or otherwise—should the insured person die.
When must insurable interest exist?
It is important to understand that insurable interest must exist at the time the policy is taken out, not necessarily at the time of death. Once a valid life policy is in place, a change in relationship (such as divorce or the sale of a business) does not automatically invalidate the policy—provided the policy was lawfully established with insurable interest in place at inception.
Common categories of insurable interest
While South African law does not provide an exhaustive list of relationships that automatically qualify, the following categories are widely accepted by both the courts and life insurers as constituting insurable interest:
- Spouses and life partners: A legally married spouse or recognised life partner is considered to have an automatic insurable interest in the life of their partner. This includes both civil and customary marriages, as well as long-term life partnerships with shared financial responsibilities. The relationship must be ongoing at the time of policy inception, although keep in mind that insurers may request proof of the relationship where the couple is not legally married.
- Parents and children: A parent has insurable interest in the life of a child, and vice versa. It is not unusual for parents to insure their children for the purpose of covering funeral expenses or education costs in the event of a tragedy. Similarly, adult children often insure their parents to provide for the financial consequences of their passing, such as settling debt or funding medical and burial costs.
- Siblings and extended family: While siblings and extended family members do not automatically qualify for insurable interest, it may be accepted where there is demonstrable financial dependence or shared responsibilities. For example, a sibling who supports a disabled brother financially may be permitted to take out cover, subject to insurer approval.
- Employers and key employees: Businesses may take out life cover on key employees—commonly referred to as key person insurance—where the death of the employee would cause financial loss to the company. The employer must be able to demonstrate how the individual’s contribution affects the financial well-being of the business.
- Creditors and debtors: A creditor may take out life insurance on the life of a debtor to ensure repayment in the event of death. This typically applies to loans, sureties, and other credit arrangements. However, note that the amount insured must match the value of the outstanding debt – and the insurer will usually require a copy of the loan agreement to verify the insurable interest.
- Business partners: Co-owners of a business may take out policies on each other’s lives to ensure business continuity. These arrangements are often structured through formal buy-and-sell agreements and should be supported by shareholder or partnership agreements, clearly setting out valuation methodology and funding mechanisms in the event of death.
Consent of the life assured
Even where insurable interest is present, a life policy may not be taken out without the knowledge and written consent of the person whose life is being insured. This is to prevent abuse, fraud, and any perception of financial motive in another’s death. Most insurers require the life assured to complete medical underwriting and personally sign the application documentation, with the only exception being where a parent insures the life of a minor child.
The consequences of absent insurable interest
Where a policy is taken out in the absence of insurable interest, it may be deemed void ab initio (from the outset) in terms of South African contract law. This means that the contract never legally existed, and the insurer may refuse to honour a claim. Further, there may be criminal or civil implications where a person is found to have acted fraudulently or without appropriate disclosure. To avoid complications, it is essential that insurable interest can be substantiated at the time of application.
Discretion of the insurer
While the legal principle of insurable interest must be met, insurers have some discretion when it comes to assessing the existence and nature of the relationship. In borderline cases—such as friends, cohabitants, or extended relatives—the insurer may ask for additional information or documentation to establish the legitimacy of the relationship. These may include financial records, affidavits, shared household documents, or written explanations of dependency.
The requirement for insurable interest is fundamental to the integrity of the life insurance industry and acts as a safeguard against abuse. When considering life cover on another person’s life, it is crucial to ensure that a legitimate relationship exists, that the person being insured consents to the cover, and that the relationship is accurately and honestly disclosed to the insurer. Seeking guidance from a financial advisor can help clarify any grey areas and ensure that policies are structured in line with both the law and the insurer’s internal underwriting requirements. In doing so, policyholders can ensure their cover is valid, their intentions are clear, and their loved ones are properly protected.
Have a super day.
Sue
