Life insurance is not always something you purchase for yourself. With insurable interest and the consent of the insured person, you may be able to purchase a life insurance policy for someone else such as a spouse, child or family member. If you depend on someone else financially, it may be possible for you to purchase a life insurance policy for them to help alleviate the financial hardship you would face in the event of their death (up to a specified death benefit amount). Below, Bankrate’s insurance editorial team takes a look at insurable interest: what it is, how to get it and its potential role in planning your financial future.

What is insurable interest in life insurance?

Even if you can afford to, you cannot take out a life insurance policy on anyone you choose. When it comes to taking out a life insurance contract on someone other than yourself, life insurance companies require you to first prove you have an insurable interest in the insured person. To have insurable interest most typically means you are financially dependent or would experience financial hardship if the insured person were to pass away. However, it is important to note that the death benefit from a life insurance policy will not cover all of beneficiaries’ needs indefinitely. Instead, it may be helpful to view the death benefit as a financial cushion rather than a complete replacement of a person’s income.

For example, take a married couple with two children. Both parents work, but one works part-time to help take care of the children. The full-time-working parent may take out a life insurance policy on the part-time-working parent because losing them would cause financial hardship. Without the other part-time-working-parent there to bring in extra household income and help take care of the children, the parent working full-time might have to quit their job, take on different hours or hire someone to watch the children during work hours.

Likewise, the parent working part-time could also take out a life insurance contract on their spouse’s life. The death benefit could help the family maintain their lifestyle up to the policy’s limit while giving the part-time-working parent time to adjust to being the family’s sole income provider.

Insurable interest is most common in immediate family relationships, though other relationships can qualify as insurable interest:

  • Spouse
  • Children (adopted or natural)
  • Grandparents and grandchildren
  • Siblings
  • Corporations and business partnerships

What is proof of insurable interest?

Proof of insurable interest is part of the initial life insurance application. Insurable interest and consent of the insured person is a requirement before a life insurance company can approve and issue a life insurance contract. The insured person may consent by signing a form stating that they are aware that there is a life insurance policy being taken out for them, or by going in person to a life insurance agency to verify their identity and their relationship to the policyholder. A phone interview may also be conducted between the life insurance company and the person buying insurance or the person listed as the life insurance beneficiary.

If you purchase a life insurance policy as the policyholder and insured, insurable interest automatically exists for you and your beneficiaries. In a direct relationship, either through blood, marriage or adoption decree, insurable interest is generally easy to prove based on the relationship status. In a business partnership, such as a corporation purchasing a life insurance policy on a key officer, a business contract or other form of proof that the company will experience financial hardship and loss upon the insured’s death is needed.

What if you do not have insurable interest?

If you do not have an insurable interest in the insured person, you cannot buy a life insurance policy. Proving insurable interest also requires consent and acknowledgement from the insured person that the policyholder wants to take out a life insurance contract on their behalf. This prevents someone from taking out a life insurance policy on someone without their knowledge.

When you are both the policyholder and insured person, insurable interest is necessary for both the insured person and the chosen beneficiary. If the insured does not designate a beneficiary, anyone seeking the insured’s death benefit will also have to prove insurable interest when the insured person passes away. These safeguards are in place to prevent life insurance company insolvency from death benefit payouts and increases in the cost of life insurance.

Sometimes, insurable interest cannot be proven. For instance, you would not be able to take out a life insurance policy on your elderly neighbor just because they are sick and may die soon if you cannot prove you would face financial hardship after they pass. Similarly, while your spouse has an insurable interest in your life and can take out a life insurance policy with your consent, they cannot name their best friend as the beneficiary, since that friend will not face financial loss upon your death.

Types of life insurance

When you take out a life insurance policy, you have several choices to make. The amount of coverage and the type of life insurance needed are the first decisions to make.

  • Term life insurance: Term life insurance offers temporary coverage. The coverage amount and premium paid stay the same for a certain length of time, usually between 10 and 30 years. You may choose to renew the policy at your current age when it expires, convert it into a permanent life insurance policy before it expires based on your insurer’s terms or let it cancel if you no longer need the coverage. Keep in mind that renewing term life insurance will mean that your premium will be assessed at your current age and health status and may mean you pay more.
  • Permanent life insurance: Permanent life insurance provides coverage for the rest of your life as long as the premiums are paid. The initial cost is higher, but it can be more cost-effective if you outlive the term policy. While term life may be a good choice to cover temporary needs like debts and childcare, permanent life insurance could be better for building cash value and covering end-of-life needs, like funeral expenses.

Frequently asked questions

    • To purchase a life insurance policy for your parent, you must have their consent. If you will not be able to afford medical bills, funeral costs or other future expenses when they pass, it may be worthwhile to have a conversation with your parent about life insurance.
    • You may purchase life insurance for your child’s parent if you meet these two criteria: you can prove insurable interest and you have their consent to purchase the policy. For example, if you co-parent with your child’s mother or father and they provide you with child support or alimony, that may be enough to establish insurable interest because you or your child would experience financial hardship in the event of the other parent’s death.
    • When buying life insurance, insurable interest must exist at the time the life insurance policy is purchased. If the policyholder and insured person are different, both the policyholder and named beneficiary must have an insurable interest and prove financial loss and hardship if the insured were to pass away.