When you apply for life insurance, insurers evaluate your financial background, including your income, assets, and age, to determine how much coverage they can offer you. That process is called evidence of insurability (EOI).
Evidence of insurability only applies to the financial fit of a policy. Life insurance is designed to cover any loss that will occur if you die, but it doesn’t exist for you to make a profit. Evidence of insurability ensures that you won’t have any financial incentive to die.
What is evidence of insurability?
Evidence of insurability is proof that you qualify for the coverage you’re asking for. Your death benefit amount should align with your assets, income, and the needs of your dependents. It’s separate from your health-related history, which determines how much you pay for that coverage.
Your evidence of insurability is assessed by insurers because life insurance coverage isn’t meant to be a way for your family to get rich — it’s a financial safety net. If you die prematurely, your life insurance coverage is essentially meant to replace your lost income, cover your debts, and pay for your funeral expenses.
→ Learn more about how to buy life insurance
Evidence of insurability requirements
Your proof of insurability relies on something called insurable interest, which is essentially proof that someone would be financially burdened in the event of your death.
Insurers also look for financial justification or verification that your income and assets are proportionate to the coverage amount you’re applying for.
While your insurable interest and financial justification for life insurance can set your life insurance coverage limit, they have no impact on how much you pay for that coverage — your premiums are separately determined by your health profile, family history, lifestyle choices, and age.
You can demonstrate evidence of insurability in a number of ways.
1. Income
The most common reason people get life insurance is to replace their income if they die. Insurers will give you coverage in proportion to what your expected earnings are. That way, your family will still get the money you expected to earn during your lifetime, even if you pass away unexpectedly.
If you’ve been unemployed long-term, you might not be eligible for traditional life insurance coverage whatsoever. You may be asked to prove that you are on the job hunt or to provide pay stubs and documentation from your last job.
Though stay-at-home caretakers don’t make an income, they’re still eligible for coverage based on their partner’s income or earnings.
2. Age
Just as life insurance rates increase with age, life insurance companies use your age to determine the amount of coverage you can get.
Your income is multiplied by the number of working years you could feasibly have left, but in general the younger you are, the higher the amount of coverage you can get. Each life insurance company has its own general guidelines about this.
If you’re in your 20s, your coverage amount can get as high as 40 times your income.
If you’re 45, you can typically apply for a maximum of 20 times your income, because that would take you to age 65.
If you’re in your late 60s, the amount of coverage you can get can drop as low as five times your income.
Once you enter your 70s, the amount of life insurance you can get is up to the life insurance company’s discretion.
3. Debt
Aside from income and age, the insurance company may look at your mortgages and other debts as financial justification for purchasing life insurance.
If you have taken on any debt, you can get life insurance coverage to cover that amount and make sure that your family will not be left to pay it off. You’ll also protect them from losing their home, car, or anything else you’ve purchased using debt if you die.
4. Other assets
If you have other major assets, such as a business or unearned income through investments or other means, you may be able to use them to get life insurance coverage as well. Insurers evaluate these types of assets differently and may ask for additional documentation to prove insurability.
If you’re asking for coverage that seems disproportionate to your circumstances, they may follow up with additional questions. It’s always good to have the appropriate paperwork on hand to show the agent working on your application in case they ask for any documentation.
While it may be tempting to lie about your financial circumstances to get the best policy, life insurance companies run a soft credit check on you during the application.
If they see that you falsified information, you can be disqualified from purchasing coverage or your policy can be invalidated due to insurance fraud. Insurers also share this type of information with each other, which may hinder you from shopping around for a policy elsewhere.
Who has insurable interest?
When you apply for life insurance, you’ll have to list a beneficiary – the person who will receive the death benefit when you die. This person also has to demonstrate insurable interest, meaning you’ll need to show they’ll be financially impacted by your death. You can always update this person later on if you need to.
There are a few relationships that are valid for insurable interest. These people usually include:
Spouses or domestic partners
Children of the insured
Business partners
Ex-spouses who depend on the insured for financial support
Any other individual whose financial well-being might be at risk if the insured died
Some relationships may require additional paperwork and evidence to demonstrate insurable interest, including:
Girlfriends, boyfriends, and non-legal partnerships
Friends
Adult children
Siblings
If your beneficiary is one of the above, you’ll have to demonstrate the financial relationship of both parties to the insurer.
Life insurance companies might ask you to prove the relationship’s financial dependency or that any financial obligations are shared — such as bills or a mortgage — in order to name them as a beneficiary on the policy.
→ Learn more about life insurance beneficiaries
What if I can’t show evidence of insurability?
Most people are able to prove some level of insurability, whether through their income, household contributions, debt, or other assets. If you truly can’t find evidence of insurability, you may be one of the rare people who don’t need life insurance coverage.
However, you can get life insurance coverage to account for the cost of funeral expenses. Many people opt to get a small final expense policy to cover end-of-life costs. Final expense insurance is a type of whole life insurance that doesn’t expire. It provides a small amount of life insurance coverage and doesn’t require evidence of insurability.
A licensed advisor at Policygenius can help you determine how much life insurance coverage you need and who you should name as a beneficiary to make sure your family is cared for in the event of your death.
