Can I Take Out a Life Insurance Policy on Myself?

Individuals can take out a life insurance policy on themselves. Life insurance provides a financial benefit to designated individuals or entities upon the insured’s passing. This benefit helps secure the financial future of loved ones, cover outstanding debts, or provide for ongoing expenses, offering peace of mind.

Understanding Insurable Interest

A foundational principle in life insurance is “insurable interest,” meaning the policy owner must have a legitimate financial stake in the life of the insured. This requirement prevents speculative use, ensuring policies provide financial protection. Without insurable interest, an insurance contract is not legally enforceable.

An individual inherently possesses an insurable interest in their own life, so this requirement is automatically met when applying for a policy on yourself. This differs from situations where one insures another, such as a spouse or business partner, where a financial dependency must be established. Insurable interest applies at the time of purchase, not necessarily at the time of a claim.

Types of Individual Life Insurance

When an individual takes out a life insurance policy on themselves, they generally choose between two broad categories: Term Life Insurance and Permanent Life Insurance. Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years. Premiums remain fixed for the term, and a death benefit is paid only if the insured passes away within that term. If the insured outlives the term, the policy expires without a payout or accumulated cash value.

Permanent life insurance offers coverage for the insured’s entire life, as long as premiums are paid. This category includes Whole Life, Universal Life, and Variable Universal Life. Whole life insurance features level premiums and a guaranteed cash value that grows tax-deferred, accessible via loans or withdrawals. Universal life insurance offers flexibility, allowing policyholders to adjust premium payments and death benefits, and builds interest-earning cash value.

Variable universal life (VUL) insurance combines lifelong coverage with an investment component. Policyholders can allocate cash value to sub-accounts, similar to mutual funds, for growth potential. However, VUL cash value fluctuates with market performance, introducing investment risk. While these policies offer flexibility and growth potential, they are generally more complex and may have higher costs compared to other life insurance options.

The Application and Underwriting Process

Applying for a life insurance policy involves a detailed application and underwriting process, through which the insurance company assesses the applicant’s risk profile. This process begins with an application requesting comprehensive personal information. This includes medical history, current health conditions, lifestyle choices such as smoking habits, hobbies, and sometimes financial information to ensure the requested coverage aligns with the applicant’s financial situation.

A common component of underwriting is a medical exam, often called a paramedical exam. This exam, usually paid for by the insurer, involves measuring height, weight, pulse, and blood pressure, along with collecting blood and urine samples. These samples are tested for various health indicators, including cholesterol, blood sugar, and the presence of nicotine or other substances. For older applicants or those seeking higher coverage amounts, additional tests like an electrocardiogram (EKG) or a treadmill stress test may be required to assess heart health.

Underwriters review information from the application, medical exam, and other data like driving records. They evaluate the risk, determine eligibility, and establish premium rates. Applicants in good health generally receive more favorable rates. Those with pre-existing conditions or higher-risk lifestyles may face higher premiums or modified coverage terms. Some policies, particularly those with simplified or guaranteed issue underwriting, may require fewer medical questions or no exam, but often come with higher premiums due to the increased risk to the insurer.

Policy Ownership and Beneficiary Designation

When an individual takes out a life insurance policy on themselves, they are typically both the insured person and the policy owner. As the policy owner, they hold significant rights and responsibilities throughout the policy’s life. These rights include naming and changing beneficiaries, transferring policy ownership, surrendering the policy for its cash value (if applicable), and taking loans against any accumulated cash value. The owner is also responsible for ensuring that premiums are paid to keep the policy in force.

A crucial aspect of policy ownership is the designation of beneficiaries, who are the individuals or entities chosen to receive the death benefit upon the insured’s passing. It is standard practice to name at least one primary beneficiary. Policyholders can also designate contingent beneficiaries, who receive the death benefit if primary beneficiaries are unable to. It is important to keep beneficiary designations updated, particularly after significant life events such as marriage, divorce, or the birth of children, to ensure the policy proceeds are distributed according to current wishes.

If no beneficiary is named, or if all designated beneficiaries are deceased or cannot be located, the death benefit typically becomes part of the insured’s estate. In such cases, the funds may be subject to a lengthy and costly probate process, and they could be used to pay outstanding debts before being distributed to heirs according to state intestacy laws if there is no will.