People most commonly take out a life insurance policy to cover their own life.
However, the policy benefits are actually covering their loved ones in the event they pass away. The proceeds would cover associated final expenses, such as funeral costs, a replacement of income, and more.
But, what if you want to buy life insurance on someone else?
There are numerous reasons to do this, especially if the person provides for you, financially. What if they die and then you’re left with nothing?
Life insurance on this person could help ensure you are protected, as well.
Now, buying life insurance on someone else seems simple enough, but it actually has a few things you’ll want to watch out for.
Let’s talk about them.
Why Buy Life Insurance On Someone Else, Anyway?
The first question you probably have is, “Why should you buy life insurance on someone else in the first place?”
The main reason is to help further protect yourself in the event of untimely passing. For instance, you can buy life insurance on your spouse or ex-spouse to help protect yourself in the event of his/her death.
Other common examples include:
- Parents buying life insurance on their children, and the reverse, children buying life insurance on their parents.
- Grandparents buying life insurance on their grandchildren. Though slightly more complicated, this can ensure the grandchild is financially protected without requiring them to make payments on premiums. It can also act as a gift on future insurability!
- Employers buying life insurance on their employees, non-profits buying life insurance on donors, and businesses buying life insurance on business partners.
- Banks and lending firms might even want to buy a life insurance policy on their executives, called bank-owned or corporate-owned life insurance.
As you can see, the reasons to buy life insurance on someone else are numerous. And the way it’s actually done varies depending on the circumstances as well.
Who Can You (Legally) Buy Life Insurance For?
The key thing you need to understand is you can generally only buy life insurance for someone with insurable interest.
Insurable interest means you have a relationship with them which contains some type of financial or monetary interest in the insured person’s life continuing.
Simply put, it means you have an interest in person’s life which involves a loss of financial means, in some way. Their death will have a big financial impact on your life, which life insurance could protect against.
This is why buying life insurance for certain relatives is so complicated. You must show you have a vested interest in their life. In other words, you depend on them, financially, or there is a debt owed of some kind.
Siblings are a good example. Sometimes you can buy life insurance on a brother or sister, but really only if you depend on them financially. This financial dependence must be proven.
Here are the 9 main types of people you can buy life insurance on:
- Divorced, ex-spouse
- Key employees
- Business partners
- Non-profit donors
- Yourself (if taking sizable loan from bank or lender)
Once again, the actual process of buying life insurance on someone else is different depending on your relationship with the person.
The Person Needs to Know You’re Buying It
Another factor to consider is the person you’re buying life insurance on must know you’re buying it on them!
In other words, you need their consent. They must know you’re getting a life insurance policy on them – and they must agree with it.
Furthermore, the person you hope to insure must almost always be complicit in the application process. You’ll need to include their personal information along with a current medical exam.
In the past, it was actually possible to buy life insurance on someone without them knowing.
It’s no longer possible. It’s been outlawed around the country and your chances of accomplishing it are none.
In fact, life insurance providers prevent people from insuring strangers by requiring the person being insured to sign a consent form. It’s also committing fraud, and you can go to jail.
The consent form, and the application, also help prove you have insurable interest on the person you’re attempting to cover.
The reasons states have outlawed stranger owned life insurance (STOLI) are simple. The dangers of such policies were very real.
When someone buys life insurance on someone they don’t know, they have a financial motive for the person’s life to end. There were more than a handful of circumstances involving murder, hired hits, or simply strangers recruiting elderly people as part of a scheme.
The new rules and regulations require consent from the insured are aimed to prevent nefarious activity of this sort.
How to Buy Life Insurance on Someone Else, The Right Way
The process of buying life insurance on someone else is straightforward.
First you find a life insurance provider who offers the policy you are looking for.
The next step is usually proving insurable interest as well as consent. These are the two most important factors any company will look at.
Once both have been proven, the application process is much like the application process for anyone applying for life insurance.
You must fill out an application for the insured person. For traditional coverage, it will cover a wide range of health and lifestyle topics including:
- Personal information
- Lifestyle (drinking and smoking)
- Weight and BMI
- Overall Health
- Medical History
- Known Medical Conditions
An underwriter at the life insurance company will then review the application to assess the overall risk of the person being insured.
Just because you can prove insurable interest and consent on the person you want to insure, doesn’t always mean you will actually qualify for traditional coverage.
If your application for life insurance is denied on medical or other grounds, there are still a handful of alternatives available.
Chief among these is no medical exam life insurance with, the most common type being a guaranteed issue life insurance policy.
Find the Best Life Insurance on Someone Else
We always recommend exploring life insurance from several providers, even if it’s for someone else.
And this is our value add to you; we work with more than 50 carriers on your behalf, all at once.
Not all life insurance underwriters assess risk the same way. One company might may much better premiums than another. We can weed through them for you.
Reviewing multiple companies at once lets you shop around, but without having to the leg work yourself. It lets you not only find the most affordable coverage, but the best policy and coverage types as well.
Sometimes the thought of buying life insurance on someone else can seem shady.
And, indeed, there are shady reasons someone might do it. But, thanks to new rules and regulations, it’s much more difficult for individuals of nefarious intent to unlock these shady benefits.
The real reason to buy life insurance which covers another person is to protect yourself (or someone else), financially, in the event they pass away.
This type of life insurance coverage on a person who financially supports you ensures your life doesn’t turn into financial ruin when they pass away.
While finding life insurance on someone has a few more hoops, and requires their cooperation, it can be done.