Can Anyone Take Out a Life Insurance Policy on Anyone?

Life insurance offers financial protection to individuals and their families when unexpected events occur. While many people consider purchasing a policy for themselves, a common question arises regarding the ability to secure coverage on another person. It is generally not possible to obtain a life insurance policy on just anyone. Specific requirements exist to ensure these financial contracts serve their intended purpose of providing genuine protection rather than facilitating speculative or harmful activities.

What is Insurable Interest

Insurable interest is a fundamental legal principle in life insurance. It requires that the person or entity purchasing a life insurance policy on another individual would experience a financial loss or other recognized detriment upon the insured person’s death. The concept of insurable interest helps prevent situations where policies might be taken out for speculative purposes or to create a moral hazard. Without this established interest, a life insurance contract is considered invalid or void.

The insurable interest must exist at the time the life insurance policy is purchased or initiated. It does not necessarily need to exist at the time of the insured’s death for the policy to remain valid. Insurance companies scrutinize applications to confirm the presence of this interest, as it underpins the legality and ethical integrity of the policy.

Common Relationships That Establish Insurable Interest

Insurable interest is commonly recognized across various relationships, primarily those involving a reasonable expectation of financial loss or dependence. Among family members, spouses have an inherent insurable interest in each other due to their shared financial lives and mutual support. Parents often have an insurable interest in their minor children, reflecting the potential costs associated with a child’s death. Adult children may also have an insurable interest in their parents, especially if there is financial dependency or a need to cover end-of-life expenses.

Business relationships also frequently establish insurable interest. Business partners commonly insure each other, as the death of one partner could cause significant financial harm or disruption to the joint enterprise. Companies may purchase “key person” life insurance on essential employees, executives, or officers whose unique skills or contributions are vital to the business’s financial stability.

A creditor-debtor relationship can also create insurable interest. A creditor can take out a life insurance policy on a debtor, but this coverage is limited to the outstanding amount of the debt. This ensures the creditor can recover the loan balance if the debtor dies, protecting their financial interest. Documentation like marriage certificates, birth certificates, loan agreements, or business contracts serve as proof of these relationships during the application process.

Outcomes of Lacking Insurable Interest

If a life insurance policy is issued without the necessary insurable interest, it is considered “void ab initio,” meaning it was invalid from the very beginning. No death benefit would be paid out to the named beneficiary upon the insured’s passing. The premiums paid on such a policy might also not be recoverable by the policyholder, depending on the circumstances and the jurisdiction.

The requirement for insurable interest is a safeguard against policies being used for illicit or speculative purposes, such as “Stranger-Originated Life Insurance” (STOLI) schemes. In STOLI arrangements, policies are initiated with the intent to transfer benefits to individuals or entities who have no legitimate connection or financial interest in the insured person. Insurance companies implement rigorous underwriting processes to verify insurable interest during the application phase. This due diligence helps prevent the issuance of void policies and protects the integrity of the insurance system.