Who Has Insurable Interest Under Tennessee Law?

Insurable interest is a legal requirement in Tennessee (and all states) that the person purchasing or owning a life insurance policy must have a legitimate financial interest in the continued life of the insured. This requirement exists to prevent life insurance from being used as a speculative or wagering contract and is a foundational principle of insurance law that has been in place for centuries.

Under Tennessee law (TCA 56-7-201), insurable interest exists in the following relationships. Every person has an insurable interest in their own life — you can always purchase insurance on yourself and name any beneficiary. This is the most straightforward form of insurable interest and places no restrictions on who you choose as your beneficiary or how large a death benefit you purchase (subject to carrier financial underwriting requirements).

Close family relationships create automatic insurable interest: spouses, parents and children, grandparents and grandchildren, and siblings all have recognized insurable interest in each other. The rationale is that family members have a natural, emotional, and financial interest in each other's lives. The financial relationship does not need to be proven in detail — the family relationship itself establishes the legal basis for insurable interest. This includes adopted children, stepchildren in many circumstances, and other legal family relationships.

Business relationships that create insurable interest include business partners (each partner has an interest in the other's life because their death affects the business), employers and key employees (the employer would suffer financial loss from the employee's death), creditors and debtors (the creditor has an interest in the debtor's life up to the amount of the debt), and corporations and their officers or directors. Business insurable interest is based on the financial impact that the insured person's death would have on the business operations, profitability, or financial obligations of the policyholder.

Financial dependency can also establish insurable interest. If one person financially supports another — such as an adult child supporting an elderly parent, or a non-married domestic partner who shares financial obligations — insurable interest may exist based on the financial dependency relationship. The key question is whether the death of the insured would create a genuine financial hardship for the policy owner. Courts evaluate these relationships on a case-by-case basis.

Insurable interest is required only at the time the policy is issued, not throughout the policy's life. If the relationship that created insurable interest later ends (such as through divorce or dissolution of a business partnership), the policy remains valid. The policy owner can continue the coverage and the beneficiary designation remains in effect. This principle is important for understanding that life insurance policies are long-term contracts that survive changes in the underlying relationships.

Attempting to purchase a life insurance policy without insurable interest violates Tennessee law and can result in the policy being voided. Stranger-Originated Life Insurance (STOLI) arrangements, where investors purchase policies on strangers' lives as investment vehicles, are prohibited under Tennessee law. These arrangements violate the insurable interest requirement because the investor has no legitimate financial interest in the insured's continued life — their financial interest is actually in the insured's death, which inverts the fundamental purpose of life insurance.

The insurable interest requirement also has implications for policy transfers. While a policy owner can transfer (assign) a policy to anyone after it has been issued — even someone without insurable interest — transfers that appear to circumvent the insurable interest requirement may be challenged. The distinction between a legitimate secondary market transaction and a STOLI arrangement can be legally complex, and Tennessee courts evaluate these situations based on the totality of the circumstances.