Can I Take Life Insurance Out on Anyone?

Life insurance provides a financial benefit to designated individuals upon the death of the insured, protecting loved ones from financial hardship. While many consider life insurance for their own protection, securing a policy on another person involves specific regulations and principles.

Understanding Insurable Interest

A foundational principle in life insurance is “insurable interest,” requiring the policyholder to demonstrate a legitimate financial or emotional connection to the insured. This ensures the policy is obtained for protection against loss, not for speculative purposes. Without this interest, a life insurance policy is considered a wagering contract and is legally void.

Insurable interest exists in relationships where one would suffer a financial or emotional loss if the insured person were to die. Common examples include spouses, children, parents, and siblings. Business partners often have an insurable interest, especially when a partner’s death could impact the business’s financial stability. Creditors may also hold an insurable interest in a debtor, limited to the outstanding debt.

The Requirement of Consent

Beyond insurable interest, obtaining consent from the person being insured is a requirement for most life insurance policies. This written consent helps protect privacy and prevents fraudulent activities. An adult individual must agree to have a policy taken out on their life.

Limited exceptions to this consent rule exist, such as parents securing policies on their minor children. In business contexts, consent is often implied or pre-arranged through formal contracts. Employer-owned life insurance policies on employees require notice and written consent from the employee to ensure the death benefit remains tax-exempt for the employer.

Consequences of Lacking Requirements

If a life insurance policy is obtained without insurable interest or proper consent, it is deemed “void ab initio,” meaning it was never legally valid. The insurer is not obligated to pay out the death benefit. Such policies are viewed as against public policy, often likened to gambling on a life, and can carry legal ramifications for misrepresentation or fraud.

In cases where a policy is voided due to a lack of insurable interest or consent, the premiums paid might be returned, though this depends on the specific circumstances and the degree of culpability of the party involved. Insurers have the right to contest a policy if they discover material misrepresentations or the absence of these requirements.

Applying for Coverage on Another Person

Assuming the requirements of insurable interest and consent are met, the process for applying for life insurance on another person involves several practical steps. The individual initiating the policy, known as the policy owner or applicant, typically begins the application. This process often mirrors applying for a policy on oneself.

The insured person will need to provide detailed personal and health information, which may include undergoing a medical examination. Their signature on the application form serves as formal consent for the coverage and the release of their medical data. The insurer then undertakes an underwriting process, assessing the risk based on the insured’s health, lifestyle, and other factors to determine eligibility and premium rates. Upon approval, the policy is issued to the owner, outlining the terms and conditions of the coverage.