Can You Buy a Life Insurance Policy on Anyone?

Life insurance is a contract between a policyholder and an insurer, designed to provide financial protection. It offers a death benefit to designated beneficiaries upon the insured individual’s death. This financial support helps loved ones manage expenses and maintain stability during a difficult time.

The Principle of Insurable Interest

The ability to purchase life insurance on another person hinges on “insurable interest.” This principle mandates that the policy owner must suffer a genuine financial or emotional loss if the insured person dies. It ensures policies provide financial protection against unforeseen risks rather than being used for speculative gain.

This requirement prevents a “moral hazard,” where a policyholder might be incentivized to cause harm to the insured to collect a payout.

Most states in the United States uphold the insurable interest requirement for a valid life insurance contract. The policy owner must demonstrate a legitimate financial stake or connection to the insured person. This ensures the insurance contract is based on a need for indemnification against loss. This interest must exist at the time the policy is purchased.

Establishing Insurable Interest

Insurable interest typically arises from relationships where one person’s death would result in a financial or emotional impact. Family relationships are recognized, with spouses generally presumed to have an insurable interest due to mutual financial dependence. Parents often have an interest in dependent children, and adult children may have an interest in aging parents, particularly if there is financial reliance or responsibility for end-of-life costs.

Business relationships also establish insurable interest. A company or business partner may have an interest in a key employee or another partner whose death would cause significant financial loss to the business or disrupt its continuity. This is common in “key person” insurance, where the death benefit helps offset losses, cover recruiting costs, or ensure business operations continue without severe interruption. Such arrangements require documentation, like partnership agreements, to prove the financial implications of the individual’s role.

Creditor-debtor relationships represent another common scenario for insurable interest. A creditor may secure a life insurance policy on a debtor, up to the amount of the outstanding debt, to protect against financial loss if the debtor passes away before repayment. This is often seen with large loans, mortgages, or other financial obligations, where loan agreements serve as proof of the financial interest. In all these instances, the policy owner’s potential for financial detriment upon the insured’s death forms the basis for the insurable interest, ensuring a legitimate purpose for the policy.

Consent and Application Process

Even when a clear insurable interest exists, obtaining life insurance on another person almost universally requires the insured individual’s explicit written consent. This consent is crucial due to privacy concerns, particularly regarding the sharing of personal medical information, which is a necessary part of the underwriting process. The process typically begins with a detailed application form, which the insured person usually needs to sign, formally confirming their agreement to be insured and allowing access to their health records.

As part of the application, the insured individual may undergo comprehensive medical examinations or complete detailed health questionnaires provided by the insurer. This information is vital for the insurer’s underwriting process, which assesses the risk associated with insuring the individual and determines appropriate premium rates. The underwriting process involves a thorough evaluation of factors such as the insured’s age, current health status, medical history, and lifestyle to accurately calculate the potential payout risk over the policy term.

Once the application, consent, and all required medical information are submitted and thoroughly reviewed, the insurer evaluates the policy for approval. If the application meets the insurer’s criteria, the policy is then issued, and the policyholder becomes responsible for ongoing premium payments. The policy owner maintains control over various policy aspects, including naming beneficiaries and managing the policy’s terms, but the insured’s initial consent remains a foundational step in establishing the policy’s validity.