Can I Put a Life Insurance Policy on Anyone?

Life insurance offers financial protection, providing a death benefit to designated individuals upon the passing of the insured person. While many people purchase policies on their own lives, many wonder if they can secure coverage for someone else. Specific conditions must be met to insure another individual.

The Insurable Interest Requirement

A fundamental legal principle in life insurance is “insurable interest,” requiring the policyholder to demonstrate a financial or emotional stake in the insured person’s life. It ensures insurance contracts provide genuine financial protection. Without this, life insurance could be used for speculative or unethical purposes, such as profiting from another’s death.

It prevents insurance from becoming a form of gambling on human lives. It also mitigates moral hazard, preventing policyholders from being incentivized to harm the insured for financial gain. This principle ensures the policyholder would suffer a financial loss if the insured individual were to die. Insurable interest must exist at the time the policy is purchased.

Establishing Insurable Interest

Establishing insurable interest involves demonstrating a direct financial dependency or a close relationship where a financial loss would occur upon the insured’s death. Common examples include familial relationships, where spouses usually have an insurable interest in each other due to shared financial well-being. Parents often have an insurable interest in their dependent children, and adult children might have an insurable interest in aging parents who rely on them for support.

Insurable interest also exists in business contexts. Business partners often insure each other’s lives to protect the enterprise from the financial impact of a partner’s death. Employers may secure policies on key employees whose skills are vital to the company. Creditor-debtor relationships also establish insurable interest, allowing a lender to insure a borrower’s life to safeguard against unrecovered debt.

Consent for Coverage

Even with insurable interest, explicit consent from the insured person is almost always mandatory. This consent ensures the individual is aware of and agrees to the policy being taken out on their life. The insured person typically needs to participate in the application process, which may involve signing forms, providing personal and medical information, and potentially undergoing a medical examination.

Obtaining a policy without the insured’s knowledge and consent is generally illegal and can invalidate the policy. There are limited exceptions, such as parents purchasing policies for their minor children, where parental consent is sufficient. However, for adults, the requirement for active consent is a crucial safeguard against fraud and protects individual privacy and autonomy.

Policy Ownership and Beneficiary Designation

Understanding the distinct roles within a life insurance policy is important, especially when placed on another person. The policy owner is the individual or entity who purchases the policy, pays the premiums, and has control over the policy’s decisions. This includes the right to name or change beneficiaries, access any cash value, or even cancel the policy.

The insured is the person whose life is covered by the policy; their death triggers the payout of the death benefit. While the policy owner and the insured are often the same person, they can be different, as is the case when insuring another individual. The beneficiary is the individual or entity designated by the policy owner to receive the death benefit when the insured passes away. The policy owner designates the beneficiary, and this designation can typically be changed at any time unless an irrevocable beneficiary has been named.