Should I let someone else own my life insurance policy?

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Should I let someone else own my life insurance policy?

Someone else has taken out a life insurance policy on you. It sounds like the beginning of a murder mystery, right? Except it’s not much of a mystery because obviously the person who took out a life insurance policy on you is the murderer, right?

Not always! There are actually plenty of reasons (none of which are murder) someone might want to take a life insurance out on another person. One example would be a business partner — if you’re in business with someone, it totally makes sense to own a life insurance policy for them. Another example might be your adult children — if they still owe private student loans, that debt could pass to you if they die.

If you want to take out a life insurance policy on someone else, you need to prove to the insurer that you have something called "insurable interest." You can also think of insurable interest as financial interest — if this person died, you would be put into financial hardship, unless you had a life insurance policy on them. Go back to our examples — without your business partner, your business could potentially go under and you would lose income.

Same goes for marriage (which is really just a gussied up business partnership, am I right?). A lot of people buy life insurance for themselves because it protects their family, but it goes both ways. You could buy and own a life insurance policy for your spouse. Just know that if they ever die under mysterious circumstances, you will be closely investigated.

But we’re avoiding the pertinent question, here — should you actually let someone take a life insurance policy out on you? Luckily, it is entirely under your control. The life insurance application process typically requires a medical exam, which you obviously need to consent to. Even if you don’t need to take a medical exam, you probably still need to sign the policy before it’s officially in effect.

In most cases, the only real disadvantage to not owning this policy is that you’re not in control of it. You don’t pay the premiums (yay!), so if your business partner or spouse or parents decide to stop paying it, the policy will no longer be in effect. If they don’t need the policy anymore, that’s fine, but if they stopped paying either because they forgot or they can’t afford it, it could be disastrous.

Taking all of that into account, it would make sense for someone who wanted to take a life insurance policy out on you to, well, actually talk to you before doing so. That will give you a chance to assess the reasons they have for wanting to own a life insurance policy on you. Most of the time, if someone went through the trouble of coming up with a financial backup plan involving life insurance on another person, their reasoning is pretty sound. If you’re concerned, you can always discuss it with your own accountant, financial advisor, or lawyer.

Image: Michael Bently