Can I Buy Life Insurance for Someone Else?

It is possible to purchase a life insurance policy on another individual, a practice known as third-party ownership. This arrangement can serve various financial planning needs, offering a way to provide financial security for dependents or business interests. Specific conditions must be met to ensure the policy’s validity and adherence to legal requirements.

Understanding Insurable Interest

A foundational requirement for buying life insurance on someone else is establishing “insurable interest.” This concept means you would experience a genuine financial or emotional loss if the insured person were to pass away. Without demonstrating this connection, an insurance policy is generally considered an unlawful wager and could be deemed void. This rule prevents policies from being taken out by individuals with no legitimate stake in the insured’s continued life.

Common relationships that typically establish insurable interest include close family ties, such as a spouse insuring a partner, a parent insuring a child, or adult children insuring their parents. In these cases, the financial and emotional interdependence often creates a clear basis for potential loss. Beyond family, insurable interest also exists in business relationships, where the death of a key employee or partner could lead to significant financial hardship for the business. Creditors can also have insurable interest in a debtor, especially if a substantial loan might not be repaid upon the debtor’s death.

Securing Consent and Navigating the Application

Once insurable interest is established, the next step involves securing the explicit consent of the person whose life will be insured. This consent is a non-negotiable requirement, typically obtained in writing and through their signature on the life insurance application. The proposed insured must be fully aware that a policy is being taken out on their life.

The insured’s participation extends beyond consent, as they are required to undergo the traditional underwriting process. This includes answering health questions about their medical history and lifestyle. Depending on the insurer and policy amount, a medical examination may also be necessary, involving blood and urine samples. This personal and health-related information is essential for the insurance company to assess risk and determine policy eligibility and premium rates.

Defining Policy Roles: Owner, Payer, Insured, Beneficiary

When a life insurance policy is purchased for someone else, distinct roles emerge, each carrying specific rights and responsibilities. The “policy owner” is the individual or entity with full control over the policy. This owner has the authority to make changes, such as modifying beneficiaries, taking policy loans, or even surrendering the policy for its cash value if it’s a permanent type of insurance.

The “premium payer” is the person or entity responsible for remitting regular payments to the insurance company to keep the policy in force. This individual or entity may or may not be the policy owner. The “insured” is the person whose life is covered by the policy; their death triggers the payout of the death benefit. Finally, the “beneficiary” is the designated individual, organization, or trust that receives the death benefit. In a third-party ownership scenario, the policy owner, premium payer, insured, and beneficiary can all be different individuals or entities, creating a flexible structure for various financial arrangements.

Typical Situations for Third-Party Ownership

Third-party ownership of life insurance is a common practice in several scenarios, allowing individuals or entities to manage financial risks associated with another person’s life. Spouses often purchase policies on each other to provide financial security for the surviving spouse and family. Parents secure life insurance on their minor children, sometimes to ensure future insurability or for estate planning purposes, though the insurable interest is typically based on the parent’s financial responsibility for the child.

In the business world, third-party ownership is prevalent for purposes like key person insurance or funding buy-sell agreements. Business partners may insure each other, with the company or the partners as beneficiaries, to provide liquidity upon a partner’s death for business continuity or to buy out their share. Creditors may insure a debtor, ensuring repayment of a loan if the debtor dies before the obligation is fulfilled. These examples illustrate how insurable interest and explicit consent converge in practical applications.