Tennessee law requires insurable interest at the time a life insurance policy is issued, meaning the applicant must have a legitimate financial or emotional stake in the continued life of the insured. This requirement, codified in TCA Title 56, prevents life insurance from being used as a speculative instrument — essentially a wager on another person's life — and protects the integrity of the life insurance system. The insurable interest requirement is one of the foundational principles of insurance law, ensuring that life insurance serves its intended purpose of providing financial protection to those who would suffer economic or emotional loss from the insured's death.
Under Tennessee law, insurable interest is presumed to exist in several relationships. Every person has insurable interest in their own life and can name any beneficiary they choose — this is the most fundamental application of the principle. Spouses have insurable interest in each other, reflecting the financial and emotional interdependence of the marital relationship. Parents have insurable interest in their children, and children have insurable interest in their parents. Other family relationships (siblings, grandparents/grandchildren) may establish insurable interest depending on the specific circumstances and financial interdependence, though these are evaluated on a case-by-case basis rather than being presumed.
For business relationships, Tennessee recognizes insurable interest between business partners, between a business and its key employees, between creditors and debtors (to the extent of the debt), and between employers and employees whose death would cause financial loss to the business. These relationships support the legitimate business purposes of key person insurance, buy-sell agreement funding, loan collateral coverage, and other business-related insurance needs. The key factor in business relationships is demonstrating that the applicant would suffer a genuine financial loss from the insured's death — not merely a speculative interest in the outcome.
An important principle under Tennessee law is that insurable interest must exist at the time the policy is purchased but is not required at the time of a claim. This means a policy purchased during a valid marriage remains enforceable even after divorce, and a key person policy remains valid even after the employee leaves the company. The death benefit will be paid to the designated beneficiary regardless of whether the insurable interest relationship still exists at the time of death. However, policies procured without insurable interest at inception are void from the beginning — they were never valid, and no benefits will be paid.
Tennessee also addresses Stranger-Originated Life Insurance (STOLI), which involves third parties with no insurable interest arranging life insurance policies on others as investment vehicles. In a STOLI arrangement, an investor or group of investors induces an individual (often an elderly person) to apply for a large life insurance policy, funds the premiums, and then acquires ownership of the policy through a transfer or assignment. The investors then profit when the insured dies, essentially turning life insurance into an investment product. Tennessee law, consistent with most states, generally prohibits STOLI arrangements because they lack genuine insurable interest at inception and convert life insurance into a speculative instrument.
The distinction between legitimate life insurance transactions and STOLI can sometimes be nuanced. A legitimate policy purchased by someone with insurable interest can later be sold through a life settlement transaction, which is legal and regulated in Tennessee. The difference is that the original policy was purchased for a legitimate insurance purpose, not as an investment vehicle from the start. Tennessee's life settlement laws regulate the secondary market for life insurance policies, providing consumer protections while allowing legitimate transactions.
Understanding insurable interest is important for several common planning scenarios in Tennessee. Business owners purchasing key person insurance should document the financial value of the key employee to the business. Partners in buy-sell agreements should ensure that the cross-purchase or entity-purchase structure properly establishes insurable interest. Family members applying for coverage on relatives outside the presumed-interest categories should be prepared to demonstrate the financial relationship. And anyone considering a life settlement or transfer of an existing policy should understand how insurable interest affects the transaction.
A licensed agent in our network can help Tennessee residents understand the insurable interest requirements that apply to their specific situation, ensuring that their coverage is properly structured and enforceable under Tennessee law.