With life insurance, the person who has it moves the risk of dying to the insurance company. Not always is the person whose life is being insured the person whose life is being insured. So, a life insurance contract has three parts: the insurer, the person who is insured, and the person who owns the policy. The other person who is very important is the beneficiary. This is the person who gets the insurance money if the insured person dies. One or more of these people could be the same person. For example, if I buy my own life insurance and name my spouse as the beneficiary, I am both the insured and the owner. In the same way, if my wife buys a life insurance policy on me and names herself as the beneficiary, she is both the owner and the beneficiary.
Insurable interest is an important idea in this case. You have to have what is called a "insurable interest" in the person's life. In the 1800s, it was common for people to buy insurance policies on the lives of other people on the chance that they would die.
For example, if I knew you were going on a dangerous trip, I might buy you a life insurance policy in the hopes that you wouldn't make it and I'd get a big payout. No one's life can be insured these days. You have to show that you want that person to stay alive. You are always thought to have an insurable interest in the lives of your spouse and guardians, if you are a minor, but you have to prove it for all other relationships. If an employee is very valuable to the company, if a sports team has a star player, or if a famous actor signs a contract to make a movie, the company will be able to buy life insurance for that person.
Most life insurance policies have a suicide clause that says the policy won't pay out if the insured dies by suicide, usually within two years. There is also a time for contests. This will also take about two years, and if the insured person dies during this time, the insurance company has more rights to look into the death before deciding whether to pay out or not.
The principle of insurable interest will also affect how much the insurance policy is worth. For example, if your spouse gives you $10,000 a year in support, you probably won't be able to get a $50 million insurance policy on their life. The amount to be paid out and how likely it is that the insured will die will be used to figure out the premium.
