Can I Buy Life Insurance on Someone Else?

Life insurance provides a financial payout to beneficiaries upon the death of the insured individual. While many obtain policies for themselves, a common question is whether one can purchase life insurance on someone else. The answer is yes, but it depends on specific conditions that ensure the policy serves its intended purpose of protection rather than speculation.

Understanding Insurable Interest

A fundamental concept in life insurance is “insurable interest,” a legal requirement ensuring the policyholder has a legitimate stake in the insured’s continued life. This principle prevents moral hazard, which could arise if individuals profited from the death of someone they have no genuine connection to. Without it, life insurance could become a form of gambling.

Insurable interest means the policy owner would experience a financial or emotional loss if the insured person passed away. This loss must be demonstrable, not merely theoretical. For a policy to be valid, insurable interest must exist at the time of purchase. It does not need to persist until the insured’s death, but its presence at inception is non-negotiable. Insurers evaluate this connection during the application process; if a clear insurable interest cannot be demonstrated, the application will typically be rejected.

Establishing Insurable Interest

Insurable interest is commonly established through relationships with financial or emotional dependency. Close family relationships often demonstrate this connection. Spouses, for instance, generally have an insurable interest in each other, as the death of one partner often leads to significant financial strain, impacting household income or childcare. Parents may also have an insurable interest in dependent children, particularly to cover potential financial burdens like end-of-life costs or co-signed loans. Adult children often have an insurable interest in their parents, especially if they anticipate covering funeral expenses or other financial obligations.

Business relationships also create insurable interest. In “key person” insurance, a business may purchase a policy on an employee whose unique skills are vital to the company’s financial stability. The individual’s death would result in a direct financial loss for the business. Business partners also possess an insurable interest in one another, as the passing of one partner could severely impact joint enterprise operations and profitability.

Creditor-debtor relationships also form a basis for insurable interest. A lender can have an insurable interest in a borrower’s life up to the outstanding debt, ensuring the loan can be repaid even if the borrower dies. This is common in mortgage or credit insurance arrangements.

The Application Process

Once insurable interest is established, obtaining a life insurance policy on another person involves several stages. A primary requirement is obtaining the insured individual’s consent, typically provided in writing via their signature on the application form. This protects individuals from policies being taken out without their knowledge. Exceptions are rare, such as a parent purchasing coverage for a minor child.

The insured individual will generally undergo a medical examination as part of underwriting. This exam, usually at no cost, helps the insurer assess health and risk, including measurements of height, weight, blood pressure, and samples. This assessment determines eligibility and premium rates.

The application requires detailed information from both the policy owner and the insured, including personal identification, medical history, lifestyle, and financial details. Accurate and complete information is imperative to avoid future validity issues. The policy buyer becomes the owner, controlling its terms, and designates a beneficiary who receives the death benefit. The beneficiary can be the policy owner or another party, provided the initial insurable interest is maintained.

Outcomes of Lacking Insurable Interest

Obtaining a life insurance policy without valid insurable interest has severe consequences. Such a policy is “void ab initio,” meaning invalid and unenforceable from its beginning. This can be determined at any point, even years later, leading to significant financial ramifications.

If a claim is filed on a policy lacking insurable interest, the insurer will typically deny the death benefit payout, leaving beneficiaries without expected financial protection. Premiums paid on a void policy are often not recoverable, resulting in a complete loss of invested funds.

Taking out a policy without insurable interest carries legal and ethical implications. It is viewed as wagering on a life and is against public policy. This practice is associated with “stranger-originated life insurance” (STOLI) schemes, where investors initiate policies on individuals with no genuine relationship for speculative profit. Such arrangements are prohibited, as they create moral hazard and can invite criminal activity.