Can I Buy a Life Insurance Policy for a Family Member?

Life insurance provides financial protection for loved ones, a concept many understand when considering their own coverage. A common question arises when individuals contemplate extending this security to other family members. Purchasing a life insurance policy on someone else involves specific considerations and steps, ensuring the arrangement is legally sound and meets your objectives. This guide covers prerequisites, information gathering, the application process, and policy management.

Understanding Insurable Interest and Consent

A fundamental requirement for purchasing a life insurance policy on another person is demonstrating “insurable interest.” This means you would experience a financial or emotional loss upon the insured’s death. This legal requirement prevents policies from being taken out purely for speculative gain. For example, a person who depends on another’s income has an insurable interest.

Insurable interest is generally presumed in close family relationships, including spouses, children, and parents, as a financial or emotional connection is inherent. For other relatives, like siblings or extended family members, insurable interest may need to be clearly established, often by demonstrating financial support or a caregiving relationship. Beyond insurable interest, the explicit consent of the family member whose life is being insured is necessary for the policy’s validity. This consent entails their full knowledge of the policy, cooperation with the application process, and includes their signature on the application form and participation in any required medical examinations. Without their participation and agreement, an insurer will not issue the policy.

Gathering Necessary Information and Making Key Decisions

Before initiating a formal application, you will need to gather comprehensive personal and medical information from the family member. This includes their full legal name, date of birth, Social Security number, and detailed medical history. Past and present medical conditions, current medications, names of treating physicians, and family health history are relevant. Details about their lifestyle habits, including smoking status, alcohol consumption, and any hazardous hobbies, are important for the insurer’s assessment. Providing accurate and complete information is important, as discrepancies can lead to issues during underwriting or policy invalidation.

Alongside collecting this data, several decisions must be made to align the policy with your financial goals and the family member’s needs. You will need to consider the type of life insurance, such as term life for a specific period, or permanent policies like whole life or universal life that offer lifelong coverage and a cash value. Determining the appropriate coverage amount is an important step, often based on potential lost income, outstanding debts, and future financial obligations. Deciding who will be responsible for paying the premiums, whether it’s you, the insured family member, or a shared arrangement, requires consideration. Initial thoughts on who should legally own the policy and who should be designated as the beneficiary are important at this stage, as these choices influence the application and future policy management.

The Application and Underwriting Journey

Once you have gathered the required information and made initial decisions, the formal application process begins. Applications can typically be submitted online, through paper forms, or with the assistance of a licensed insurance agent. The application form will require signatures from both the applicant (the proposed policy owner) and the person whose life is being insured. This dual signature confirms consent and ensures all parties acknowledge the terms of the agreement.

Following application submission, the insurer initiates the underwriting process, where they assess the risk associated with insuring the individual. This often involves a medical exam, typically conducted by a paramedical examiner at a convenient location. The exam may include recording height, weight, vital signs like blood pressure and pulse, and collecting blood and urine samples to check for various health indicators. Insurers also review medical records, prescription history, and sometimes driving records or financial information to evaluate overall risk. Based on this comprehensive assessment, the underwriter determines insurability and sets the premium rate. Outcomes can range from approval at a standard rate, approval with a higher premium due to increased risk, postponement for further information, or denial of coverage.

Policy Ownership and Beneficiary Management

After a life insurance policy is issued, understanding policy ownership is important. The policy owner is the individual or entity with legal control over the policy, possessing rights such as changing beneficiaries, taking policy loans, or surrendering the policy for its cash value. While the policy owner and the insured person are often the same, in family arrangements, the purchaser (you) might be the owner while the family member is the insured. This distinction is important for managing the policy’s future.

Designating beneficiaries is a responsibility of the policy owner. You can name primary beneficiaries, who receive the death benefit first, and contingent beneficiaries, who would receive the benefit if the primary beneficiaries are no longer living. Regularly reviewing and updating these designations is important, particularly after significant life events like births, deaths, or marriages, to ensure the death benefit is distributed according to your wishes. Life insurance premiums are generally not tax-deductible. However, the cash value component of permanent life insurance policies grows on a tax-deferred basis, meaning taxes are not paid on the growth until the funds are withdrawn. The death benefit paid to beneficiaries is typically received income tax-free. However, if the death benefit is part of a large estate, it could be subject to federal or state estate taxes above certain thresholds.