For instance, assume a bank loans $5,000 to an individual

For instance, assume a bank loans $5,000 to an individual

An insurable interest may arise out of a close blood relationship, but being the relative of a potential policyowner does not automatically establish an insurable interest. For example, under most circumstances, a person would probably find it difficult to establish an insurable interest in an aunt, uncle, or cousin unless the policyowner could show that a significant financial or emotional loss would result upon the death of the relative.

There is another important aspect of insurable interest; the relationship between a policyowner and a creditor. This relationship brings about another type of insurable interest.

A creditor can establish an insurable interest with a debtor. This fact establishes the insurable interest between the bank and the debtor. For this reason, the bank can purchase life insurance on the life of the debtor and receive the death benefit of the life insurance policy, but only in an amount which reflects the balance of the unpaid loan, should the debtor die prior to repaying the loan.

Insurance purchased by a creditor on the life of a debtor must be in an amount that approximates the size of the debt. So, if a debtor owes a creditor $1,000, the creditor could not purchase a $10,000 life insurance policy on the life of the debtor.

For this reason, most credit life insurance purchased on the life of a debtor has a reducing death benefit, which keeps pace with the diminishing loan balance. Therefore, if a debtor owes $5,000 to be repaid over a period of five years, the death benefit might begin at $5,000 to match the original amount of the loan. However, this policy would eventually reduce to $0 at the end of five years when the loan has been repaid.

The Application Form

In order for a person to purchase life insurance they must make a request to the insurance company of their choice. The form on which this request is made is the application.

Most companies now require that the proposed insured be physically present in front of the agent while the questions on the application are answered. The application is crucial in that it provides the data that the underwriters and insurance company will use to determine whether to issue a policy.

The application is a life insurance company document containing questions and information, which the company uses in evaluating the insurance risk and in properly preparing the policy if one, is issued. The agent completes the application by asking the applicant the questions.

Obviously, the bank will suffer financially if the debtor dies before the loan is repaid

The information requested on the application generally includes items such as the applicants full name and address, age, sex, ily histories, present physical condition, and a description of the type and the amount of insurance applied for. It also includes the name of the person who is the beneficiary of the insurance along with data on other insurance owned and applied for, as well as whether or not the applicant was ever refused life insurance.

In view of the importance of the application, it is essential that the application be completed fully and accurately. If the application is incomplete, the underwriting process and policy issue will be delayed until the necessary information is obtained. The company depends upon accurate information to make a proper evaluation of the proposed insured.

When the proposed insured signs the application, it constitutes a formal request to the company that a policy be issued on the proposed insureds life. In addition, the signature on the application indicates that the information is true and correct to the best of the knowledge of the proposed insured.

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