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Although you cannot take a life insurance policy out on just anyone, you can take a life insurance policy out on another person under certain circumstances. Life insurance is typically purchased to provide financial security to dependents or beneficiaries in the event of an untimely death of an insured individual. To purchase a policy on another person, you must have their consent while simultaneously proving that their loss could put a negative strain on your current financial situation. The following guidelines can help you determine whether you should take a life insurance policy out on someone else.
How a life insurance policy works
When purchasing a life insurance policy, there are three parties involved:
- Policyholder: The policyholder is the owner of the policy, makes premium payments and is authorized to make changes.
- Insured: This is the person whose life is insured by the policy. The policy’s death benefit will typically be paid out upon the insured’s death, given the death occurs within the policy period and there is no evidence of fraud, criminal activity or non-payment of premium.
- Beneficiary: This is the person or people listed on the life insurance policy who will receive the death benefit when the insured dies. Beneficiaries can also be trusts, estates or organizations.
Often, the insured and policyholder are the same person. However, there are situations where someone may want to take out a life insurance policy on another person. Bankrate’s insurance editorial team has conducted research to help you understand the process of taking out a life insurance policy on someone else.
Can you take out life insurance on someone else?
To take out a life insurance policy on someone other than yourself, you must have a financial stake in their life. It is impossible to take out a life insurance policy against an ailing public figure or an athlete in a high-risk sport. Betting against someone’s life is not only unethical but also not financially prudent for life insurance providers to underwrite this type of coverage.
It is only possible to take out life insurance on someone else if:
- There is some relationship between you, such as a business partner, spouse or parent.
- The person being insured consents to a life insurance policy being taken out on them.
- The relationship passes the “insurable interest” test, which means you can demonstrate that the insured’s death would have an adverse financial impact on you.
For example, one spouse can purchase a life insurance policy for the other spouse since they rely on each other’s income. And employers can take out life insurance on employees since losing them could result in financial damage to the company.
Who can you take out a life insurance policy on?
You may be able to take out a life insurance policy on someone else if you have the following relationships, as long as you would suffer a financial loss or undergo a financial hardship if they passed away:
- Adult child
- Business partner
- Former spouse or life partner
- Minor child (under age 18)
- Spouse or life partner
You cannot take out life insurance on someone if you cannot demonstrate that the person’s earning potential impacts your life. For example, you likely will not be able to take out a policy on a friend whose finances do not have any effect on your life or everyday well-being. Keep in mind that you will need the person’s permission to take out a life insurance policy on them.
How to get life insurance for someone else
While each insurance company’s underwriting processes are different, there are a few common steps you will need to take to purchase life insurance for someone else.
Select a type of life insurance policy
The first decision is whether permanent or temporary coverage is necessary. Term life insurance is generally cheaper than permanent life insurance and is a temporary solution for a period of time such as 10, 20 or 30 years. Whole life and universal life insurance, which are types of permanent life insurance, stay in effect as long as the premiums are paid and build a cash value amount that can also be used to borrow or withdraw money.
Learn more: What is cash value life insurance?
No matter what kind of life insurance coverage is needed, it’s a good idea to shop around for quotes from several life insurance carriers to find the best price and terms. The same type of coverage could vary in price from one carrier to another so it is beneficial to obtain multiple quotes, according to the Insurance Information Institute (Triple-I).
Once it’s time to apply for coverage, the next step is to get permission from the person you plan on insuring. They will need to sign a consent form and likely undergo a medical exam before the policy is approved. Even if a policy that doesn’t require a medical exam is selected, failing to obtain signed consent from the person you are insuring could be considered insurance fraud.
Prove you have an insurable interest
You have an insurable interest in someone’s death if you will suffer a financial loss when they pass away. If you do not have insurable interest in the person you plan to insure, you cannot purchase a life insurance policy on them.
Most familial relationships are easy to prove when checking medical or personal history and interviewing the insured. However, in cases like business partnerships, life partnerships and non-legally binding relationships, proof of insurable interest may be required. To prove such situations, you may be required to provide copies of business contracts, healthcare forms and other applicable documentation that shows both the relationship and insurable interest.
When to buy life insurance for someone else
Some circumstances make purchasing a life insurance policy on someone else a smart financial decision.
Financially protect family members
For people who are raising children together and have significant assets such as a home, a life insurance policy could make up for lost income if one of them passes away. A life insurance policy on an aging parent could provide cash to pay off debts left behind or cover their burial costs. Families with a higher net worth may want to consider life insurance to pay any estate taxes.
Ensure business continuity
The death of business partners or key employees can sometimes endanger a company’s operations. While a life insurance payout may not replace the individual’s skills and knowledge, it could provide capital to recruit a replacement or cover critical costs while the business adjusts so that it can remain viable.
Guaranteed future coverage
Some families have a history of genetic conditions and chronic illnesses that make obtaining life insurance coverage difficult. A permanent life insurance policy for a child or young adult that is purchased while they are still healthy guarantees coverage for their entire lifespan, even if they’re diagnosed with a health condition in the future.
Frequently asked questions
When selecting a life insurance carrier, there are several important factors to consider, according to the Triple-I. Some of these factors include the insurance company’s financial stability, market reputation, claims-paying record, product offerings and premium price.
Life insurance covers many things but is primarily intended to help financially protect beneficiaries of the policy upon the policyholder’s death. Expired policies, failure to pay premiums, fraud, criminal activity and certain exclusions outlined within the policy can lead to nonpayment of the death benefit.
Anyone concerned with what will happen after they pass away may want to consider life insurance. Those who worry about leaving loved ones with a financial burden, such as mortgage payments, auto loans, credit card balances, college tuition or burial costs, might also consider life insurance.
The appropriate level of life insurance will vary depending on your situation — assets, debts, future financial obligations and the age of children can all come into play. Bankrate’s life insurance calculator may be a good starting point. Also, speaking with a life insurance agent or financial planner can help you think through your needs and discover policy benefits that are commonly overlooked.
Life insurance prices depend on several factors, such as the type of policy you require, your age and your general health. Term life tends to be the cheapest type of life insurance, but keep in mind it is only active for a certain period of time. One way to find cheap life insurance is through your employer. Many offer group life insurance, which may not require a medical exam. Working with a knowledgeable life insurance expert to identify your needs and budget can help you narrow down your options.