Life insurance is meant to provide financial support for someone who may need it after your passing, and because of this, you can’t purchase a policy on just anyone. You could not, for example, buy a policy on a celebrity or public figure that benefits you if they should die. In fact, you will need to get permission from the person who is insured and be able to prove that their loss will have a negative financial impact on the beneficiary. Bankrate’s insurance editorial team created this life insurance guide to explain what you need to know when taking out a policy on someone else.
How a life insurance policy works
When purchasing a life insurance policy, there are three parties involved:
- Policyholder: The policyholder is the owner of the policy, makes premium payments and is authorized to make changes.
- Insured: This is the person whose life is insured by the policy. The policy’s death benefit will be paid out upon the insured’s death, provided that the policy is active and premiums paid, there is no evidence of fraud or criminal activity, and the death was not the result of suicide during the one to two-year exclusionary period.
- Beneficiary: This is the person or people listed on the life insurance policy who will receive the death benefit when the insured dies. Beneficiaries can also be trusts, estates or organizations.
Often, the insured and policyholder are the same person. However, there are situations where someone may want to take out a life insurance policy on another person. Bankrate’s insurance editorial team has conducted research to help you understand the process of taking out a life insurance policy on someone else.
Can you take out life insurance on someone else?
To take out a life insurance policy on someone other than yourself, you must have a financial stake in their life. It is impossible to take out a life insurance policy against an ailing public figure or an athlete in a high-risk sport. Betting against someone’s life is not only unethical but also not financially prudent for life insurance providers to underwrite this type of coverage.
It is only possible to take out life insurance on someone else if:
- There is some relationship between you, such as a business partner, spouse or parent.
- The person being insured consents to a life insurance policy being taken out on them.
- The relationship passes the “insurable interest” test, which means you can demonstrate that the insured’s death would have an adverse financial impact on you.
For example, one spouse can purchase a life insurance policy for the other spouse since they rely on each other’s income. And employers can take out life insurance on employees since losing them could result in financial damage to the company.
Who can you take out a life insurance policy on?
You may be able to take out a life insurance policy on someone else if you have the following relationships, as long as you would suffer a financial loss or undergo a financial hardship if they passed away:
- Adult child
- Business partner
- Child
- Former spouse or life partner
- Grandparent
- Minor child (under age 18)
- Parent
- Sibling
- Spouse or life partner
Not all life insurance contracts require a monetary relationship, however. Some insurers may be willing to write policies based on an emotional or sentimental relationship — such as that between a grandparent and a grandchild or between siblings. Insurable interest may also be able to be established between parents and children or spouses if there is no financial need but they are involved in a caregiver relationship. Non-working spouses can also obtain life insurance since their loss would result in a financial burden.
Another type of insurable relationship is established with key man insurance. This type of policy acknowledges the importance of a founder, owner, executive or essential employee or group of employees in a business. In this case, the reasoning is that the loss of such an individual will cause financial hardship to the company, thus making a life insurance policy an effective hedge that buys the company time to determine next steps.
How to get life insurance for someone else
While each insurance company’s underwriting processes are different, there are a few common steps you will need to take to purchase life insurance for someone else.
Select a type of life insurance policy
The first decision is whether permanent or temporary coverage is necessary. Term life insurance is generally cheaper than permanent life insurance and is a temporary solution for a period of time, such as 10, 20 or 30 years. Whole life and universal life insurance are types of permanent life insurance designed to last your entire life, as long as the premiums are paid and build a cash value amount that can also be used to borrow or withdraw money.
Get quotes
No matter what kind of life insurance coverage is needed, it’s a good idea to shop around for quotes from several life insurance carriers to find the best price and terms. The same type of coverage could vary in price from one carrier to another so it is beneficial to obtain multiple quotes, according to the Insurance Information Institute (Triple-I).
This may be especially true if the insured person has a pre-existing condition, such as diabetes or heart issues. Long-term illnesses such as these are likely to impact your rate, with insurers charging more to cover their increased risk. Every carrier has its own method of determining risk, however, so shopping around may lead to a carrier that is willing to charge less for the policy than other companies.
Get permission
Once it’s time to apply for coverage, the next step is to get permission from the person you plan on insuring. They will need to sign a consent form and likely undergo a medical exam before the policy is approved. Phone interviews between the person to be insured and the carrier are not uncommon as a means of confirming that the insured is comfortable with the policy, as well as to confirm information on the application. Even if a policy that doesn’t require a phone interview or medical exam is selected, failing to obtain consent from the person you are insuring would likely be considered insurance fraud.
Prove you have an insurable interest
“Insurable interest” is the term used to indicate that a death will lead you or another beneficiary to suffer a financial loss. Generally, you will need to prove that there is an insurable interest in order to purchase a life insurance policy. Here are some examples of relationships that may have an insurable interest:
- Spousal relationship: Since they generally share financial obligations, most spouses and life partners would have little difficulty proving insurable interest. In some cases, former spouses may also have an insurable interest if there is shared custody of children.
- Parent-child: If a parent relies on the financial support and care of an adult child, or vice versa, there is an insurable interest.
- Business relationships: An essential employee or business partner may be insured if their loss would have a significant financial impact on the company.
- Siblings or other familial relationships: There may be insurable interest in other family relationships, especially if a member of the family is providing caregiving or financial support.
- Creditor-debtor relationships: Although not common, a lender may be able to prove insurable interest in a borrower if the debt is significant and the borrower’s death would affect repayment.
Proving familial relationships is generally not difficult through interviews or checking medical or personal history. For non-married partners, a rental agreement or mortgage taken out jointly can be acceptable proof. For business relationships, documents such as contracts may be needed to prove the relationship.
When to buy life insurance for someone else
Some circumstances make purchasing a life insurance policy on someone else a smart financial decision.
Financially protect family members
For people who are raising children together, a life insurance policy could make up for lost income if one of them passes away. A life insurance policy on an aging parent could provide cash to pay off debts left behind or cover their burial costs. Families with a higher net worth may want to consider life insurance to pay any estate taxes.
Ensure business continuity
The death of business partners or key employees can sometimes endanger a company’s operations. While a life insurance payout may not replace the individual’s skills and knowledge, it could provide capital to recruit a replacement or cover critical costs while the business adjusts so that it can remain viable.
Guaranteed future coverage
Some families have a history of genetic conditions and chronic illnesses that make obtaining life insurance coverage difficult. A permanent life insurance policy for a child or young adult that is purchased while they are still healthy guarantees coverage for their entire lifespan, even if they’re diagnosed with a health condition in the future.
Frequently asked questions
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To choose the best life insurance policy, decide what kind of coverage is necessary and shop around for multiple quotes. Getting quotes from several different life insurance companies could help you find the policy type, terms and premium that fits your needs.
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Life insurance covers many things but is primarily intended to help financially protect beneficiaries of the policy upon the policyholder’s death. Expired policies, failure to pay premiums, fraud, criminal activity and certain exclusions outlined within the policy can lead to nonpayment of the death benefit.
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Anyone concerned with what will happen after they pass away may want to consider life insurance. Those who worry about leaving loved ones with a financial burden, such as mortgage payments, auto loans, credit card balances, college tuition or burial costs, might also consider life insurance.
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The appropriate level of life insurance will vary depending on your situation — assets, debts, future financial obligations and the age of children can all come into play. Bankrate’s life insurance calculator may be a good starting point. Also, speaking with a life insurance agent or financial planner can help you think through your needs and discover policy benefits that are commonly overlooked.
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Whether life insurance is an affordable option for you depends on a number of factors. The types and levels of coverage you purchase, for example, will play a role in determining what you pay. In general, term policies tend to be cheaper than permanent forms of coverage, but they may also offer fewer benefits, and they do not include a cash value that you can draw on if needed. You may want to consider working with a financial advisor or licensed agent to help you determine just how much coverage you need and can afford. Cheap life insurance may be available through your employer, or you may be able to find a policy that works for your budget by shopping around and gathering quotes from a range of carriers.
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