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§ 17.4 INSURABLE INTEREST§ 17.4 INSURABLE INTERESTA contract of insurance—that is, an insurance policy—is valid (enforceable),only when there is an insurable interest between the insured and the beneficiary.Basically, one person has an insurable interest in another person when the personthat is the beneficiary of the insurance is better off economically with the insuredalive rather than dead. Thus, the concept of insurable interest is that the beneficiarywould suffer an economic loss if the insured were to die. (Without puttingtoo fine a point on the subject, the insurable interest doctrine emanated from thecommon law, to prevent an individual from purchasing insurance on the life ofanother and then seeing to it that the other person’s life was terminated soonthereafter. The law evolved the idea of insurable interest to prevent “gambling”on the duration of individuals’ lives.) The most common example of a relationshipinvolving insurable interest is the marital relationship; likewise, key individualsare often insured by their companies.The IRS held that a charitable contribution deduction was not available, forfederal income tax purposes, for a donor’s payment of premiums for a life insurancepolicy donated to a charitable organization, when the charity was the solebeneficiary of the policy proceeds. 27 The donor was characterized by the IRS asconceding that the charitable organization involved lacked an insurable interestin the donor’s life.The IRS view in this regard was based upon two doctrines of law. One ofthese is that the transfer of the policy to the charitable organization was not atransfer of all of the donor’s rights associated with it. The IRS characterized thedonation as a gift of a partial interest in the policy, not in trust, so a deductionwas not available. 28 The interest retained was portrayed as the donor’s ability,through a will, to name the heirs who would benefit if the proceeds of the policywere returned to the estate. That is, the IRS relied on the fact that the personalrepresentative of the estate could successfully maintain an action to recover thebenefits of the policy and distribute them to others.The second doctrine of law relied on the IRS was that a deduction for thistype of charitable gift will not be disallowed merely because the interest thatpasses to, or is vested in, the charity may be defeated by the performance ofsome act or the happening of some event, if on the date of the gift it appears thatthe possibility that the act or event will occur is negligible. 29 In the subject case,the potential for exercise of the rights to be retained by the insurance companyand by the personal representative of the estate was found not to be remote.Also, the IRS pointed out that the donor could discontinue payments of the premiumson the insurance, causing the policy to lapse unless the charitable organizationpaid them.The facts underlying this ruling involved an individual who had previouslymade gifts to the charitable organization. This individual intended to apply for alife insurance policy and name the charity as the sole beneficiary of the policyproceeds. Upon receipt of the policy from the insurance company, the individual27 Priv. Ltr. Rul. 9110016.28 See § 9.23.29 See § 10.4. 535