Jason Fisher You can buy a life insurance policy on someone else, as long as they give legal consent and there is an obvious insurable interest.
People most commonly take out a life insurance policy to cover their own life, protecting their loved ones from loss of income, final expenses, and more.
But, what if you want to buy life insurance on someone else?
If you would be financially impacted by another person’s death, taking out a policy on them could help ensure you’re protected.
Below, we’ll explain who you can insure, how it works, and when buying a policy on someone else is a good idea.
In this article:
- How to start
- Rules to comply with
- Who you can insure
- When to do it
- The application process
- FAQs
How to Buy Life Insurance on Somebody Else
At the most basic level, all life insurance policies share a few simple components:
- Policyholder
- Insured
- Beneficiary
- Premiums
- Death benefit
The policyholder pays premiums to secure a death benefit for the beneficiaries when he or she passes away.
Typically, the policyholder and the insured are one and the same, but when you buy a policy on someone else, you become the beneficiary.
Therefore, the first step is to involve the person for whom you’re covering.
Buying life insurance for someone else looks a lot like buying life insurance for yourself, but there are a few rules.
While you, the policyholder, are responsible for keeping up with premiums, the insured person is involved in the application process, providing answers about their medical background and potentially undergoing an exam.
The Rules for Buying Life Insurance on Someone Else
When you take out a life insurance policy on someone other than yourself, there are two additional considerations: insurable interest and consent.
We’ll take a closer look at both of those factors below.
Insurable Interest
To apply for life insurance on someone else, you must prove that insurable interest is present.
In other words, you can only buy a policy for someone whose death would have a negative impact on your finances.
If you’re looking to insure your child or spouse, insurable interest is assumed, but buying life insurance for other individuals will likely require more extensive documentation.
Insurable interest could result from your dependence on their income, cosigned loans, or debts the individual owes you.
Consent
Rule number two is that the person you’re buying life insurance on must give their consent.
In other words, you cannot buy a life insurance policy on someone else without informing them and legally obtaining their permission.
While you may have been able to purchase life insurance on someone without their knowledge in the past, the act of fraud is now a jailable offense.
Providers prevent people from insuring strangers or relatives without their knowledge by requiring a signed consent form.
They’ll also have to be involved in the application process.
Who Can You Buy Life Insurance On?
You can essentially take out a life insurance policy on anyone else, as long as you can prove financial dependence on that person.
There are a few key individuals people take out policies on, for whom insurable interest can be easier to prove:
- Spouse/ex-spouse
- Parents
- Children/grandchildren
- Key employees/ business partners
- Non-profit donors
Based on your relationship with the individual you’re looking to insure, the application process can look different.
Outside of your spouse or child, you’ll likely have to take extra steps to prove insurable interest exists.
When Should You Buy Life Insurance on Someone Else?
The main reason to buy life insurance on someone else is to protect yourself in the event of an untimely passing.
Beyond the obvious dependence on a spouse for income, here are a few common scenarios that might warrant buying a policy for someone else:
Divorce
If your ex-spouse owes you alimony or child support, you can easily demonstrate insurable interest.
In fact, many times the court requires individuals paying alimony or child support to take out a policy with the other parent or a trust as the beneficiary.
Gift to a Child
Sometimes grandparents buy life insurance on their grandchildren to ensure the grandchild is financially protected without requiring them to make payments on premiums.
It can also act as a gift of future insurability.
While purchasing a whole life policy for a child can be costly, adding a child rider to your policy is an affordable alternative.
Business
Buying a policy on someone else is a good call for the following situations:
- Business owners buying life insurance on their key employees
- Non-profits buying life insurance on donors
- Businesses buying life insurance on business partners
- Banks and lending firms ensuring executives,with bank-owned or corporate-owned life insurance
Shared Debts
If you cosigned a loan with someone, the remaining debt will not die with them.
Private loans you could be left responsible for paying include:
- Mortgage
- Private student loans
- Credit card debt
- Auto loans
A policy amounting to the remainder of the debts could be purchased to protect you from the cost.
Parental Care
Some adult children take out life insurance policies on their parents as they grow older.
While insurable interest might be challenging to demonstrate on a large scale, obtaining a final expense policy for funeral costs shouldn’t be an issue.
You might also buy a policy on your sibling if they take care of your aging parents, naming yourself as the beneficiary to ensure both you and your parents’ livelihood.
How to Apply for Life Insurance on Someone Else
The process of buying life insurance on someone else is straightforward, starting with finding a life insurance provider who offers the policy you are looking for.
The next step will be proving insurable interest and consent, the two most important factors any company will look at.
From there, 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
- Career
- 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 mean they 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.
Frequently Asked Questions
Still have questions about insuring someone else?
We have answers to some of the most commonly asked questions on the subject.
Why can’t you buy life insurance on someone without consent?
The reasons states have outlawed stranger owned life insurance (STOLI) are simple.
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 strangers recruiting elderly people as part of a scheme.
How much life insurance can you buy on someone else?
You can’t buy a $1 million life insurance policy for yourself or someone else unless you actually need it.
in addition to proving insurable interest, you’ll have to demonstrate that the amount of coverage you’re applying for matches an actual financial need.
The policy cannot exceed a reasonable estimate of the financial impact the insured’s death would have on you.
Does the policy end if insurable interest changes?
Insurable interest matters when you apply for coverage, but life insurance providers understand that life changes.
As long as insurable interest was proven when you purchased the policy, you can still keep your coverage in place, even if circumstances change.
For instance, if you took out a policy on an ex at a time when you were financially dependent on them but no longer need their support, you can continue to pay for coverage if you wish to keep the policy in force.
Can you cancel a policy your parents took out on you?
Lots of parents purchase life insurance policies for their children when they’re minors, and that coverage can span into adulthood.
While it’s legal for parents to keep that coverage in force, they can’t apply for a life insurance policy for you once you’re an adult without your consent.
If you’re unsure whether your parents or anyone else has taken out a policy on you, you can take a look at the Medical Information Bureau.
What do you do if you suspect fraud?
If you think someone might have forged your signature and secured a policy in your name without your consent, there are several steps you can take to confront the issue.
You can file a report with the National Association of Insurance Commissioners.
If you know where the policy was purchased, you can directly contact the insurance provider, as well as the insurance bureau.
Can you transfer a life insurance policy on someone else?
You can transfer a life insurance policy taken out on another individual. Life insurance settlements can take place regardless of insurable interest.
For example, many individuals choose to transfer ownership of a policy taken out on them by a spouse when they get a divorce.
