Can Someone Get Life Insurance on Someone Else?

Life insurance functions as a financial agreement where an insurer provides a sum of money to designated beneficiaries upon the death of an insured individual. This arrangement typically involves regular premium payments by the policyholder. While commonly used to protect one’s own dependents, it is also possible to obtain a life insurance policy on another person’s life. However, this process is not straightforward and requires adherence to specific legal and ethical conditions for validity.

The Requirement of Insurable Interest

A foundational principle in life insurance is the requirement of “insurable interest,” which means a legitimate financial or emotional stake in the continued life of the insured. This interest prevents policies from being used for speculative purposes or as a form of wagering on human lives. Without insurable interest, a life insurance contract can be deemed void. The interest must exist at the time the policy is purchased, not necessarily at the time of the insured’s death.

Relationships typically satisfying this requirement include spouses, as one’s financial well-being is often tied to the other’s income. Parents may also have an insurable interest in dependent children, or adult children in aging parents, particularly if they would incur end-of-life costs like funeral expenses. Business partners frequently possess insurable interest in each other, as the death of one could significantly impact the business’s performance. Additionally, a creditor has an insurable interest in a debtor, limited to the amount of the debt, to ensure loan repayment.

Consent and Policy Ownership

Obtaining a life insurance policy on an adult without their explicit knowledge and written consent is generally not permitted. This consent is a critical requirement, with very limited exceptions, such as a parent insuring a minor child where insurable interest is inherent. Failing to secure proper consent can lead to the policy being invalidated.

A life insurance policy involves distinct roles: the insured, whose life is covered; the policy owner, who controls the policy and pays premiums; and the beneficiary, who receives the death benefit. While the policy owner pays for and manages the policy, the insured is the individual whose life is being insured. The insured’s consent is paramount, ensuring they are aware of the coverage and agree to the arrangement.

Common Scenarios and Policy Structure

Life insurance policies taken out on another person are structured to address specific financial protection needs, building upon the principles of insurable interest and consent.

Family and Spousal Policies

In spousal or family policies, one spouse may insure the other, or a parent an adult child, especially with financial dependency or shared obligations. The insuring spouse or parent typically acts as the policy owner and beneficiary, paying premiums.

Business Policies

Business insurance often features key person policies, where a company insures an employee vital to operations. The business owns the policy, pays premiums, and is the beneficiary, mitigating financial loss. Buy-sell agreements among business partners are also funded with life insurance, where partners insure each other to provide funds for purchasing a deceased partner’s share, ensuring business continuity.

Creditor-Debtor Policies

In creditor-debtor relationships, a lender might require a debtor to have a life insurance policy. The lender is typically named as the beneficiary up to the outstanding debt, ensuring repayment upon the debtor’s death.

Consequences of Non-Compliance

If a life insurance policy is obtained without the necessary insurable interest or the explicit consent of the insured, significant repercussions can arise. Such a policy may be declared void from its inception by the insurer or a court, meaning the contract is considered invalid as if it never existed. No death benefit will be paid out upon the insured’s death, and any premiums paid may not be recoverable by the policy owner. Attempting to secure a policy without meeting these requirements could also lead to legal ramifications, including accusations of fraud or misrepresentation.