You can’t buy a life insurance policy for just anyone. Before an insurance company approves your request to take out life insurance on anyone other than yourself, you must obtain the consent of the proposed insured. You also have to demonstrate you have an insurable interest. This means you would be exposed to financial loss if the other person died. It’s possible to get a life insurance policy for someone else if these conditions are fulfilled. And spouses, ex-spouses, business partners, parents and creditors all may request and get approval for life insurance coverage on someone else.
Consider talking to a financial advisor about your life insurance needs.
Life Insurance: Definition and Terms
Life insurance is an important risk management tool that guarantees payment in the event of the death of the policyholder. It’s widely used to protect people against the loss of income from someone upon whom they are financially dependent.
Most life insurance policies insure the life of the person requesting the policy. For example, the wage earner in a household may take out a life insurance policy for themselves that will provide money to support their non-working family members if the wage earner were to die.
But life insurance policies can also be taken out for someone else. For instance, a business partner may buy life insurance coverage for their business partner to protect them and the business from financial loss if the partner dies. However, ensuring someone else’s life is only permissible in certain circumstances.
When You Can Take Out Life Insurance on Someone Else
There are two key matters that have to be addressed before you can take out life insurance on someone else. First, you have to have the consent of the other person whose life will be insured. Second, you have to show you have an insurable interest in that person’s life.
It is illegal to buy insurance for anyone without that person’s consent, with one exception for minor children. The laws are written to keep people from committing insurance fraud by insuring someone’s life without their knowledge or approval.
To show insurable interest, you have to show that the death of the insured person would affect you significantly. The interest can be financial or emotional. But it must be proven to the insurance company’s underwriting unit’s satisfaction when applying to purchase life insurance for another person.
Who Can Take Out Life Insurance on Someone Else?
Despite the restrictions on insuring another’s life, there are a number of situations when someone may want to take out a life insurance policy on someone else. Here are some of the instances:
Spouses
One spouse may buy life insurance for the other if the other is the primary breadwinner. But the spouse buying the life insurance may not have the money to pay the premium.
Children
A parent, grandparent or legal guardian of a child can insure that child and name themselves as the beneficiary. This may be done to avoid having the child become uninsurable if later on they come down with a chronic illness or other condition.
Business Partner
Partners in a business may insure each other’s lives. This is so that, if one partner dies, the other will receive a cash benefit sufficient to continue the business. Or they could buy out the interest of the partner’s heirs.
Key Employee
Another business-related use is to insure the life of a key employee. This is in case a death would have a significant financial impact on the company.
Debtor
A creditor may want to get insurance on someone who owes a debt. This is so that, if the debtor dies, the creditor will receive a benefit from the policy sufficient to settle the debt.
How to Take Out Life Insurance on Someone Else
Getting a life insurance policy for someone else approved by the underwriters requires getting consent from the prospective insured person and showing insurable interest.
To show consent, the underwriters will want to see a signed statement agreeing to the coverage. In addition to signing the consent form, the proposed insured will have to participate in the underwriting process. This will usually include answering questions and undergoing a medical examination.
Demonstrating insurable interest will mean convincing the underwriters that you have a legal and significant emotional or financial interest in the well-being of the person whose life will be insured. This will mean answering questions about the insured person’s relationship with the owner of the policy. If insurable interest can’t be proven, the policy won’t be approved.
Benefits of Taking Out Life Insurance on Someone Else
Taking out an insurance policy on someone else is not the usual approach. But it can be a sensible and even essential financial move in some situations. For example, a parent whose spouse’s life is insured can rest easier knowing that if the worst happens, the family will be provided for financially.
In business, buying insurance for a business partner can help avoid potentially having to sell the business to pay the interest of an heir should one of the partners die. It can also protect against financial loss if an employee who has essential technical knowledge dies, leaving the operation unable to carry on.
Bottom Line
Buying life insurance for someone else provides a way for spouses, parents, business partners, employers and creditors to protect themselves against loss if the insured person dies. Laws and insurance company policies mean you can only buy a policy for someone who gives consent and if you can demonstrate an insurable interest.
Insurance Planning Tips
- Your selection of an insurance policy can have lasting effects on your overall finances, especially once you reach retirement. If you’re unsure of which policy to go with, a financial advisor may be able to help. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Financial planning is vital for achieving your goals for your future. Life insurance can be a major part of these plans, in addition to investing and other financial strategies. Use SmartAsset’s guide to creating a financial plan to learn more.
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