Simple test: if this person became sick, injured or disabled, would you really suffer a loss? California spells out who has an insurable interest in life and disability insurance.
Every person has an insurable interest in the life and health of (Ins. Code §10110):
Anyone they depend on, wholly or partly, for education or support. A student has an interest in the parent who pays her tuition.
Anyone under a legal obligation to them for money that the person's death or illness might delay or prevent. So a lender has an interest in a borrower.
Anyone on whose life an estate or interest vested in them depends.
Insurable interest also exists where there is (§10110.1(a)):
- a reasonable expectation of financial benefit from the person's continued life, health or bodily safety, or
- a substantial interest based on love and affection between people closely related by blood or law. Friendship alone is not enough.
An employer has an insurable interest in the physical or mental ability of its directors, officers and employees, and of others whose disability could cost it money, but it must get the insured person's written consent (§10110.1(c)).
Timing: insurable interest must exist when the policy becomes effective, but need not exist when the loss occurs (§10110.1(f)). If the relationship ends later, for example an employee leaves the company, the policy is not defeated at claim time for lack of interest.