Q

Can you take out a life insurance policy on someone else?

A

You can take out a life insurance policy on someone else as long as you have insurable interest and their signature on the policy.

Nupur GambhirRebecca Shoenthal author photo

Nupur Gambhir & Rebecca Shoenthal

Published June 29, 2020

KEY TAKEAWAYS

  • To purchase a life insurance policy on someone else you need to prove insurable interest, or prove that you will financially suffer in the event of their death

  • Even if you’re taking out a life insurance policy on someone else and pay the premiums, they will still need to be involved in the application process, complete the medical exam, and sign the final policy papers

  • While it makes sense to take out a policy on certain dependents, it is more cost-efficient to forego an additional policy and simply add on a rider if your dependents are underage

Generally, when people buy life insurance, they are applying to be both the policyholder and the insured individual on the life insurance policy, and plan to name one of their dependents as the beneficiary. But there are some occasions when it may make sense to purchase a policy that insures someone else and names you as the beneficiary.

While completely legal, purchasing a policy on someone comes with its own set of stipulations. You can’t take out a policy on just anyone. You need to have the individual’s permission (you can’t get a policy on someone without them knowing), and you must be able to show insurable interest, which is basically proof that you will suffer financially if they die.

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How a life insurance policy works

There are three parties privy to a life insurance policy.

  • The policyholder, who owns the policy, pays for the premiums, and is the only individual who can make changes to the contract
  • The insured, whose death prompts the life insurance company to pay out their beneficiaries
  • The beneficiaries, who receive a death benefit from the life insurance company when the individual covered by the policy dies

Typically the policyholder and the insured are the same person, but there are situations where you may need to pay for and own a life insurance policy that pays out a death benefit when someone else dies.

How to buy life insurance for someone else

It’s always a good idea to talk to an accountant or financial advisor to get a better sense of how a life insurance policy will work in the context of your larger financial planning. In doing so, you may discover that taking out a life insurance policy on someone else is in your best financial interest.

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.

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. You can roughly translate that to "financial interest,” which means that you would 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. Other relationships, such as business partnerships or friends, will likely need documentation.

The application process

In order to apply for a policy for someone else, you’ll need their consent to complete the application process. They’ll not only need to sign the final paperwork, but you’ll also need their cooperation for the application itself. This includes answering questions on the initial application and, for most policies, taking the required medical exam.

While you may be paying the premiums and taking care of the contractual details of the policy, the insured will still need to consent to the application process.

Who you can take life insurance out on

There are a few key reasons why it sometimes makes sense to pay for someone else's insurance. You may need or want to purchase a life insurance policy on someone else in the following situations:

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. You would name yourself as the beneficiary and the payout from the death benefit would then go toward keeping the business running.

Your spouse or life partner

If you’re the breadwinner in your family, it may make financial sense for you to purchase not only your own life insurance policy — which would name your spouse as the beneficiary if you die — but also a policy to insure your spouse.

This especially makes sense if your spouse doesn’t earn an income and cannot purchase their own policy, but provides child care that you’ll need funds for if your spouse died.

Your child

Parents and grandparents can both take whole life insurance policies out on children though it is not usually recommended. Whole life insurance can sometimes function as a long-term gift because of the cash value component that grows tax-deferred interest over time.

It’s important to note: Life insurance is meant as financial protection to cover bills and expenses that were originally covered by the deceased. Because children don’t provide financial support to their families, purchasing a life insurance policy on them is usually unnecessary unless you are using the payout to cover the cost of their funeral expenses.

A child rider, which pays out a small death benefit if your child dies, might be a better way to ensure your financial security due to its lower cost.

Your adult child

If you have cosigned private loans with your children, you may want to take out a life insurance policy to pay off those loans if your child dies prematurely, otherwise you’ll have to pay the loans off yourself.

Alternatively, if you are 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. (Or, you know, maybe to repay them for giving you an education and years of unconditional love.)

Applicable loans can include student loans, mortgages, car loans, credit cards, and more.

Your sibling

For the most part, it’s unlikely that you have insurable interest on your sibling, but there are some cases in which you might. For example, if your sister is taking care of your elderly parents and she died, your elderly parents would be at risk of losing their care.

To protect your loved ones from losing necessary financial support, you would want to purchase a life insurance policy for your sister, name yourself the beneficiary, and, in the case of your sister’s death, use that money to help continue care of your elderly parents.

Your parents

Many people take out a type of life insurance called final expense life insurance to pay for their parents’ funeral expenses when they die.

Taking out a traditional life insurance policy on your parents, such as whole or term life, can be a lot more difficult because it is hard to prove that you have insurable interest on your parents. The best option to help your parents receive coverage is to encourage them to apply for their own policy and list you as the beneficiary.

Your former spouse

Even after a separation or divorce, it’s common for ex-spouses to have shared assets or dependents. As we previously mentioned, life insurance provides financial coverage after someone dies. If you or your children still depend on your former spouse for income, childcare, or other needs, consider taking out a policy 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.

When you shouldn’t take a life insurance policy out on someone else

For a life insurance policy to go in force, the insured individual has to sign for the policy and verify their medical information. Purchasing a policy without this information is insurance fraud, and repercussions can include denied claims, canceled policies, and in some cases, prosecution. Make sure to always be honest on a life insurance application so you don’t risk losing any necessary financial support.