What Is Insurable Interest? (Hint: It's Probably Not What You Think)

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The world of insurance is, unfortunately, full of confusing terminology. And when it comes to buying insurance, whether you’re purchasing homeowners insurance, renters insurance, life insurance, or car insurance, that confusing terminology can feel like a headache. You just want to buy an insurance plan, get what you need covered, and pay a low rate. Is that too much to ask for?
One term that occasionally comes up and often feels extra confusing is “insurable interest.” Every insurance plan works with insurable interest, though it often isn’t mentioned in the language of your insurance policy. If it is, you might be confused, but don’t worry: It’s actually a very simple concept. Here’s everything you need to know.

It’s not that kind of interest

Before we get into the definition of insurable interest, let’s cover the most basic element. Because insurance policies deal with money and payment plans and protection, the assumption is usually that the word “interest” in “insurable interest” refers to the type of financial interest you might experience with your credit card bill.
That’s not the case. When it comes to insurable interest, the word “interest” just means having an interest in something.

What is insurable interest?

With that said, let’s tackle the definition of insurable interest. Insurable interest is any item that you would benefit from (financially or otherwise) continuing to exist. That’s it. Insurable interest means you have an interest in insuring something, because it will be a hardship if that thing ceases to exist, or ceases to be in good shape.
Here’s a simple example: If your car is totaled, it will be a lot of money for you to replace it. If your car is damaged, it will cost money and be a hassle to fix it. So you benefit from your car not being damaged or totaled. As a result, you have insurable interest. It’s in your interest to have your car stay in good shape, so that you don’t have to deal with the headache and financial loss of repairing or replacing it.

Insurable interest is specific to you

Part of what defines insurable interest is that it’s specific to you. Let’s return to the example of a car, but this time let’s pretend it’s your neighbor’s car. If your neighbor’s car is damaged and needs to be repaired, that’s a hardship, but it’s not your hardship. You can’t have insurable interest in your neighbor’s car, because you don’t have any benefit in the car continuing to exist.

Insurable interest is meant to protect, not incentivize

Insurable interest means that you would benefit from the continued health or existence of a specific thing. It does not mean that you would receive a greater benefit if that thing were to be replaced.
Insurance policies don’t allow you to purposely damage an item so that you can have it replaced, or put extra money in your pocket. That’s no longer insurable interest; at that point it’s just incentivizing property damage.

So what does it mean to have insurable interest?

If that all sounds confusing, let’s break it down to the simplest level. In order to get something insured, you have to have insurable interest. Whether you’re buying homeowners insurance, life insurance, or car insurance, you have to have insurable interest in order to take out a policy. It has to be in your best interest (mentally, physically, or especially financially) that the thing you’re insuring continues to exist, and continues to be in good shape.
As long as you have insurable interest, then you can purchase an insurance policy. If you don’t have insurable interest then you can’t purchase an insurance policy, which is why you’re not allowed to take out an insurance policy on your neighbor’s car.
And there you have it. Insurable interest may be a confusing sounding term, but it’s a simple concept. Anything you have insured has insurable interest to you.