Should I take a life insurance policy out on someone else?

Should I take a life insurance policy out on someone else?

There are a lot of reasons you might want to take a life insurance policy out on someone else. For example, they make great gifts! Just make sure you choose the right wrapping paper and get a very fancy bow (maybe silk?).

Alright, I know — life insurance policies make terrible gifts. Taking a policy out on another person, however, can be a smart part of your financial plan. Let’s take a look at a few common examples:

Business partner. You and a partner own a business together, and without her, it would be incredibly difficult — maybe even impossible — for you to continue the business. One example of this may be a startup company that relies on unique knowledge or a vision that your partner has. In this situation, you could buy a life insurance policy for your business partner and name yourself or the business as the beneficiary. The proceeds from this policy would then go either keep the business running or help shut it down. This type of life insurance is typically called key person insurance.

Life partner. You know, like, your spouse. Usually, people in this situation buy their own life insurance policies. But let’s say you are the primary breadwinner in your household and your spouse does not work. Of course, he does still work — he’s just working within the household without a traditional paycheck. One specific example of this is families where one parent home schools the kids. The work that he does would be irreplaceable, and you want to make sure that you’re covered in case he dies. In this situation, you would own and pay for the life insurance policy for your spouse.

Adult child. Is your adult child paying off thousands of dollars of private student loans? If your child dies prematurely, those private loans could be passed to you if you co-signed them (common practice with young adults without credit history). It would be prudent to purchase an inexpensive life insurance policy that covered your child until they either got married or finished paying off the loans.

Sibling. When it comes to taking care of elderly parents, usually one sibling takes on the task. If that sibling were to die, your elderly parents may be at risk for losing their care. You could purchase a life insurance policy for your sibling, name yourself the beneficiary, and use that money to help continue care of your elderly parents.

These aren’t the only reasons you might want to purchase a life insurance policy for someone else, but they do help demonstrate just how useful it can be as part of a financial safety net.

So how do you go about getting a life insurance policy for someone else? Well, before you start, make sure you talk to the person. You’ll need their consent for the application process, which requires a medical exam, and their signature on the final policy. You may also want to talk to your lawyer, accountant, or financial advisor to get a better sense of how this policy will work in the context of your larger financial safety net.

Once you have their permission, talk to an independent life insurance agent who can help you find the cheapest coverage for your needs. An independent agent can compare quotes from multiple insurers to make sure you’re getting the best deal.

During the application process, you’ll need to prove to the insurance company that you have something called "insurable interest." You can roughly translate that to "financial interest" — basically, you need to prove that if the insured were to die, it would put a financial burden on you. Typically, if you’re married to or are blood related to the person in question, the life insurance company will accept it. If you’re business partners, be ready with paperwork to prove that relationship.

Image: Leo Hidalgo