Purchasing a life insurance policy on someone else and designating yourself as the policy beneficiary may sound like something straight out of a crime fiction novel. But this is completely legal and in some cases a smart, even necessary, decision.
You can take out life insurance on someone else if both of these conditions are met:
- you have the insured’s consent
- you can prove that you have insurable interest in the insured (that is, you will suffer a loss, emotional or financial, if the insured dies).
How does a Life Insurance Policy Work?
Life insurance is a legal contract between the insurance company and the policy owner (also known as the policyholder). In return for the premiums paid by the policy owner, the insurer promises to pay a cash benefit to the beneficiary upon the insured’s death.
Apart from the insurer, there are three key parties in a life insurance contract:
- Policy owner: The person who owns the policy, pays premiums, and can make changes to the policy.
- Insured: The person on whose life the policy is taken. The death benefit is paid out upon the insured’s death, provided the policy is in force.
- Beneficiary: The person or persons who receive the death benefit upon the passing away of the insured. A non-living entity, such as an organization, trust, or estate, can also be named as the beneficiary.
In most cases, the policy owner and the insured are the same person. But in certain situations it makes financial sense to purchase a policy on someone else. For example, if you have a business partner, you may want to take a policy on them and name yourself as the beneficiary to ensure business continuity after their death.
Can You Take Out Life Insurance on Someone Else?
In order to be able to purchase life insurance on someone else, you must have their permission. The person whose life will be insured must sign the life insurance application and give consent. In addition to this, you must be able to demonstrate that you have an insurable interest in the insured’s death. This means you will suffer financially if the person on whose life you want to take out a policy dies.
For example, you can take out life insurance on a parent, spouse or living partner, or business partner. But you cannot purchase a policy on a stranger or public figure.
Besides signing the application form and giving a written consent, the insured must give permission to the insurer to collect data, like their medical history. Also, the insured may need to take a medical examination to complete the life insurance application process. It is almost impossible to buy a life insurance policy without the insured’s consent and participation.
How to Get Insurance for Someone Else:
The process of buying a life insurance policy on someone else is pretty much the same as purchasing one for yourself. The only differences are that you will need the other person’s written consent and must prove an insurable interest in their life.
Pick the right type of life insurance policy
First decide whether you need permanent or temporary coverage. Term life insurance is more affordable than permanent life, but the coverage is for a limited period, for example, 10, 20 or 30 years. Permanent life policies provide coverage as long as you pay the premiums, and also accumulate cash value that you can use to withdraw or borrow money.
Most term life and permanent life policies require a medical examination. If the insured has severe underlying health problems or does not want to undergo the medical test, consider a simplified issue or guaranteed issue policy. Both of these policies allow you to skip the paramedical examination, but the coverage is rather limited.
Get multiple quotes
Each insurance company has their own underwriting algorithm. That is why a person can receive different rates for the same type of coverage from different insurers. Obtaining quotes from as many providers as possible can help ensure you do not pay more than you must.
Get permission from the insured
Once you have zeroed in on the type of policy you want and picked an insurer, it is time to fill out the life insurance application. The person whose life will be insured must sign the application and give consent. You cannot buy a life insurance policy on someone without their knowledge or participation in the application process.
Show insurable interest
When taking out life insurance on someone else, proof of insurable interest in their death is part of the application process. Without it, no insurance company will issue a policy. The insurer will take steps to ensure insurable interest exists. These may include asking both the insured and the policyholder to submit a proof of identification and talking to them either over the phone or in person.
Insurable interest is most common in family relationships. Other relationships —such as business partnerships — can also have insurable interest.
You are considered to have an insurable interest in your direct dependents and those to whom you are related through blood, marriage, or adoption decree. In all these cases, all you need to do is prove the relationship status.
In a business partnership, you will likely need to submit the business contract or other documents that show you and/or the company will be impacted financially upon the insured’s death.
Examples of When to Get Insurance for Someone Else
In some situations, buying life insurance coverage for someone else makes sense. Here are a few common scenarios in which you will have an insurable interest in the person on whom you want to take out a policy.
If you are the sole income earner of your household, you may want to take a life insurance policy on your non-working spouse. While a homemaker does not contribute to the household income, they perform the all-important job of running and managing the household. If something were to happen to your spouse, those household chores will need to be taken care of in other ways, which will likely cost money. That is why it makes financial sense for a family’s breadwinner to buy life insurance for their stay-at-home partner.
After a divorce, if one party is receiving child support or spousal support payments from the other, they have a valid insurable interest in their ex-spouse. If the ex-spouse dies suddenly, the person receiving support payments may find it difficult to stay afloat. In fact, many divorce settlements require the purchase of life insurance to provide for child support and alimony if the main earner dies while support payments are still owed.
Buying a life insurance policy on one or both parents may be a smart financial decision in certain situations. For instance, a life insurance policy can help you cover funeral and end-of-life medical expenses for parents. Likewise, if you are listed as a co-signer on any of your parents’ loans, the proceeds from the policy taken out in their name can help you pay back the debts when they pass away.
You may have an insurable interest in a sibling if they are caring for your aging parents. If your sibling passes away, you may have to hire a professional caregiver, which would cost money. If you purchase a life insurance policy on your sibling and name yourself as the sole beneficiary, the payout would help you cover the cost of caring for your elderly parents.
Your business partner
It is common for one business partner to buy life insurance on the other and name themselves as beneficiary. If one partner dies suddenly, the surviving partner can use the insurance payout to purchase the deceased’s share of the business from their spouse or children.
A key employee
A company may want to buy a life insurance policy on each of its core employees. If a key person passes, the proceeds from the policy helps the business to cover the cost of replacing them.
You can take out life insurance on someone else if you will suffer a loss upon their death and have their permission. The insured will need to sign the application and the insurance company may ask you to prove insurable interest. Apart from these two steps, the process of purchasing life insurance on another person is the same as buying a policy for yourself. You must first decide which type of life insurance you want and compare quotes. Whether you want whole life or term life insurance, Dundas Life can help you buy the right coverage at the lowest-possible price.
Frequently Asked Questions
How much life insurance can you buy on someone else?
There is no cap on how much life insurance you can take out on someone else. You can buy as much coverage as you reasonably need. The death benefit amount should match the financial impact you will experience if the insured passes away.
For example, if you will likely need $1 million to offset the financial hardship and loss the death of the insured will cause, insurance companies will be willing to write you a $1 million policy, contingent to underwriting approval. However, if $1 million far exceeds the financial loss you will suffer, insurers will not approve you for that much. The purpose of life insurance is to help you meet a potential financial need, not profit from someone’s death.
Can you transfer a life insurance policy on someone else?
Yes, you can transfer a policy that you have bought on someone else. Selling an existing life insurance policy to a third party is called a life settlement and can happen regardless of insurable interest.
Can you take out life insurance on a parent?
You can buy a life insurance on a parent if they consent and you can prove you have an insurable interest.
Can someone take out a life insurance policy on me without my knowledge?
No, this is not legally possible. Someone can only buy a policy on you with your consent and participation in the application process. Unless you sign an application and consent form, a life insurance policy cannot be taken out on you.