Most people buy life insurance for themselves, meaning they’ll be both the policyholder and the insured. They’ll name a beneficiary, who is the person who receives the death benefit when they die.
But occasionally it may make sense to purchase a policy that insures someone else and names you as the beneficiary.
Getting a policy on someone else’s behalf comes with its own set of legal requirements. You can’t take out a policy on someone without them knowing, and you must be able to show insurable interest, which is proof that you’ll suffer financially if they die.
Key takeaways
To purchase a life insurance policy on someone else, you must prove financial interest between both parties.
The person you’re insuring needs to consent to the application process and sign the policy.
It’s more cost-efficient to forgo an extra policy and simply use a policy rider to cover dependents who are underage.
How a life insurance policy works
There are three parties privy to a life insurance policy.
The policyholder is the person who owns the policy, pays for the premiums, and is the only individual who can make changes to the contract.
The insured is the person whose life is insured. Their death triggers a death benefit payout to the beneficiaries.
The beneficiaries are the people who receive a death benefit from the life insurance company when the insured dies.
Typically, the policyholder and the insured are the same person. But in some cases you may want to buy a life insurance policy that pays out a death benefit when someone else dies (for example, if you share ownership of a business with someone).
→ Learn more about how life insurance works
Who can you take life insurance out on?
There are circumstances where it’s reasonable — and legal — to buy a life insurance policy on someone else, but in every case you'll need to prove that you have an insurable interest in that person.
Your business partner
If you own and operate a business with a partner, you could buy a policy on your business partner, called key person insurance. This would help you continue to operate the business in their absence.
Your spouse or partner
If you share finances with a partner, it almost always makes sense for each spouse to have a life insurance policy. In most cases, each partner owns their individual policy, but you can begin the application process for them and even own the policy if it makes the most sense for your circumstances.
Your minor child
Parents and grandparents can both take whole life insurance policies out on children, though it’s not usually recommended. Because children don’t provide financial support to their families, purchasing a life insurance policy on them is usually unnecessary.
A child rider is often a better way to insure your child at a lower cost. Child riders are add-ons you can buy for your policy that pay out a small death benefit if any of your children die.
Your adult child
If you have co-signed private loans with your children, you may want to take out a life insurance policy to cover those loans if your child dies prematurely.
Alternatively, if you’re the adult child in this scenario, it might make sense for you to take out a life insurance policy on your parents and pay their premiums, so you’re covered for the unexpected.
Your sibling
For the most part, it’s unlikely that you have an insurable interest in your sibling, but there are some cases in which you might. For example, if you bought a house with your sibling and would struggle to afford it in their absence.
Your parents
Taking out a traditional life insurance policy on your parents, such as whole life or term life, can be difficult because it can be hard to prove that you have insurable interest in your parents as an adult.
However, you may be able to get final expense insurance to cover their funeral expenses if you’d be paying for their end-of-life care. The best way to help your parents receive coverage is to encourage them to apply for their own policy and list you as a beneficiary.
Your former spouse
If you or your children still depend on your former spouse for income, childcare, or other needs, consider buying life insurance on them and naming yourself or your adult children as beneficiaries.
Sometimes, during divorce proceedings, a judge may require life insurance as part of spousal support. This court order can come alongside alimony payments, child support, or other financial-related assets.
→ Learn more about life insurance and family financial planning
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Why should I buy life insurance for someone else?
It makes sense to buy life insurance for someone else if you’ll be negatively financially impacted by their death. Most commonly, this happens in family and business relationships.
As a licensed agent, the most common scenario for when I would help an individual buy a life insurance policy for someone else was an adult child purchasing a policy for their parent.
Many times, adult children manage their parent’s finances and are responsible for handling their debts and managing funeral expenses. Getting a life insurance policy for a parent makes the financial aspects of their death much more manageable.
Make sure family members are protected financially
While getting insurance for a parent is common, it may make sense for you to take a life insurance policy on other members of your family. If there’s anyone in your family whose death would create negative financial repercussions for you, it’s good to consider taking out a life insurance policy for them.
If you’ve co-signed a loan for any of your adult children, if you share any major debts or assets with a sibling (like a mortgage on a house), or if you would be responsible for burial expenses for anyone in your family, you should consider getting a life insurance policy for them.
Ensure business continuity
If you’re a business owner and your business would suffer if any of your co-owners or employees died, you’ll be able to take out life insurance for them to protect the business financially.
There are a few ways this could make sense for your business. The first is called a buy-sell agreement. With a buy-sell agreement, a life insurance policy will provide funds to a living business partner.
The surviving business partner can use these funds to purchase the deceased partner’s share of the organization, ensuring the business will be able to continue operating.
The other type of insurance you could get to protect your business is called a key person policy. If your company has an individual who makes a significant contribution to the organization’s day-to-day operations, you can insure them.
Whether their contribution is through their technical skills, expertise, or leadership, a life insurance policy will give the company time to recover financially if this person is lost.
How to buy life insurance for someone else
If you plan to take out a life insurance policy on someone else, there are two key components to be aware of: insurable interest and the life insurance application.
Get permission
A life insurance policy is a legal contract, so all of the parties involved need to understand the agreement and willingly consent to be part of it. If you’re taking out a policy on someone else, this is usually straightforward.
You’ll just need to explain to them how the insurance policy works and get them to sign the documents for the policy to be valid. The insured person may also need to take a medical exam.
In some cases, family members can be resistant to the idea of you spending money on them. In these cases, it’s usually helpful to remind them that the insurance policy is designed to protect you financially and the cost of any premiums you pay will be worth it.
Get quotes
Once you are in agreement with the insured person about getting a policy, you’ll connect with a licensed agent to get quotes. Quotes are estimates about how much it will cost you for the amount of life insurance that you need.
Quotes vary between insurance companies because they all evaluate risk differently. The agent you work with will ask detailed questions about the insured’s health and lifestyle profile. This information will help get you an accurate quote and determine which life insurance policy will be good for you.
At Policygenius, we have a team of licensed agents who can compare rates for you among 12 different insurance companies, giving you confidence that you’re getting the best possible life insurance policy available.
Determine insurable interest
To take out a life insurance policy on someone else, you’ll need to prove to the insurance company that you have something called insurable interest.
Insurable interest means that you’re financially tied to the insured person. You need to prove that if the insured were to die, it would financially burden you.
Typically, spouses and parents can purchase policies without otherwise proving insurable interest. Others such as business partners or friends will likely need documentation to prove the financial need.
Complete the application process
To apply for a policy for someone else, you’ll need both their signature, the final paperwork, and their explicit permission and participation in underwriting to go through the application process.
This includes answering questions on the initial application and, for many policies, taking a required medical exam.
Even if you’ll be paying the premiums and taking care of the contractual details of the policy, the insured will still need to be part of the process.
When you shouldn’t take a life insurance policy out on someone else
If you can't get someone's consent or you don't have insurable interest in them, you won't be able to take a life insurance policy out on that person. For a life insurance policy to go in force, the insured must sign for the policy and verify their medical information.
Taking out a life insurance policy on someone without any insurable interest is an illegal practice known as stranger-owned life insurance or stranger-originated life insurance (STOLI or SOLI).
Investor-owned life insurance (IOLI) is a similar arrangement in which the third party is always an investor. These policies are rare due to strong life insurance regulations, but they do still exist.
In a STOLI or IOLI arrangement, a third party buys a life insurance policy on someone, usually a senior in whom they have no insurable interest, and pays the premiums. [1]
These third parties usually target seniors who are healthy enough to outlive their policy’s contestability period — making it less likely an insurance company would investigate their death claim — and collect the insurance payout after that person passes away.
Some STOLI investors bring insurance agents or the insured person into the scheme. They’ll get agents to sell fraudulent policies with the promise of high commissions and offer the insured person an upfront payment to participate.
It’s illegal to participate in a STOLI or IOLI agreement, which usually requires concealing information from an insurance provider. If the insurance fraud is discovered, repercussions can include denied claims, canceled policies, and in some cases, prosecution.
Is it legal to sell your life insurance policy?
It’s legal to sell your life insurance policy, a transaction known as a viatical settlement. Life settlement brokers buy existing policies — usually from elderly people — and continue paying the premiums in exchange for the death benefit payout when they die.
Viatical settlements are legal as long as the original policy owner proved insurable interest when they purchased the policy. However, selling your policy is usually more hassle than it’s worth, as it can be difficult to find a buyer and the sale comes with high taxes and fees.
Frequently asked questions
Can someone take a life insurance policy out on me without my knowledge?
No, someone can only take a life insurance policy out on you with your consent and participation in the application process. They also need to prove they rely on you financially.
Can you take out a life insurance policy on anyone?
You can only take out a life insurance policy on someone if you’re tied to them financially and if you have their consent. Doing so without these requirements is illegal.
Can you take out a life insurance policy on a parent?
If your parent consents, you can take out a life insurance policy on them. You’d only need to do this if you’d suffer financially upon their death, and your parent must be able to complete and answer application questions.
What is stranger-owned life insurance (STOLI) and investor-owned life insurance (IOLI)?
STOLI is a policy taken out by a third party on someone in whom they have no insurable interest. IOLI is a similar practice, but the third party is always an investor.
Additional reporting by Brian Acton.
