Employers Entitled to Life Insurance Proceeds

A beneficiary of a life insurance policy must have an insurable interest in the life of the insured in order to collect the policy proceeds upon the insured's death. An insurable interest is usually found where there is a blood or marriage relationship between the beneficiary and the insured or where the beneficiary has a direct or contractual relationship with the insured.

An employer may be so entitled to collect as a beneficiary upon an employee's life insurance policy. Most courts find that an employer has an insurable interest in the life of an employee if it has a substantial economic interest in his life. For example, an employer generally has an economic interest in the lives of its high-ranking employees, such as its officers, upon whom the business is dependent for its success. The employer's president is such a proper insured, especially if he is also a director or a stockholder. The employer may also be a proper beneficiary under a policy issued to a vice-president or a manager if such employee solicits business or takes an active role in increasing the business.

On the other hand, some courts hold that an employer has no insurable interest in the lives of its employees unless some other type of relationship, such as a creditor-debtor relationship, existed. In such jurisdictions, an insurer may raise the issue of lack of insurable interest in order to avoid liability on the policy.

In jurisdictions in which an employer does have an insurable interest in the employee's life, the termination of the employer's interest by the employee's resignation or termination may not enable the insurer to avoid paying the employer the policy proceeds upon the employee's death. As long as the insurable interest existed at the time the policy was procured, most courts find that the employer remains entitled to its proceeds, especially if the employer is the one paying the premiums. This is because the employee had no personal interest in the policy proceeds. If the employee does attempt to change the beneficiary from the employer to another party, he may encounter difficulty because most policies provide that a change in beneficiary may only be made with the written consent of the original beneficiary.

However, if the employer is dissolved, the employer's insurable interest is terminated. The insurance proceeds may then be held for the benefit of the employer's creditors.

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