Can You Get Life Insurance for Someone Else?

Obtaining a life insurance policy on another person is possible, but requires specific conditions. The most important requirement is demonstrating an “insurable interest” in the individual whose life will be covered. This principle ensures that life insurance serves its intended purpose of financial protection rather than becoming a tool for speculation.

The Foundation: Insurable Interest

Insurable interest is a fundamental concept in life insurance, signifying that the policy owner would experience a financial or emotional loss if the insured person were to die. This requirement serves to prevent speculative wagering on an individual’s life and mitigate moral hazard, which could incentivize harm for financial gain. Without demonstrating this connection, an insurance provider will not issue a policy on another person’s life.

Common relationships that typically establish insurable interest include close family members, such as spouses, parents insuring their children, or adult children insuring their parents to cover potential financial burdens like final expenses. Business relationships also frequently involve insurable interest, where partners or a company may insure a key employee whose death would cause significant financial disruption to the business operations.

Furthermore, a creditor-debtor relationship can establish insurable interest, allowing a lender to insure a borrower for the amount of an outstanding loan, protecting against financial loss if the borrower passes away before repayment. This financial or emotional connection must be present at the time the policy is purchased for the contract to be valid.

Applying for Coverage on Another

The application process for life insurance on another person involves several specific procedural steps and roles. Foremost, the individual whose life is being insured must provide explicit consent for the coverage. This typically requires their signature on the application form. The insured person may also need to undergo a medical examination or provide health information.

During the application, three distinct roles are defined within the policy structure. The “policy owner” is the individual or entity applying for the policy and who will maintain control over it, and this person must demonstrate insurable interest. The “insured” is the person whose life is covered by the policy, and upon whose death the benefit is paid. Lastly, the “beneficiary” is the person or entity designated to receive the death benefit when the insured passes away. The policy owner is responsible for initiating the application, managing the policy, and making premium payments.

Managing the Policy

Once a life insurance policy is issued and active, the policy owner holds specific rights and responsibilities. The policy owner has the authority to make changes to the policy, including altering beneficiary designations, taking out loans against any cash value accumulated in a permanent policy, or surrendering the policy. These ownership rights grant the policy owner significant control over the policy’s terms and benefits.

Beneficiary designation is a critical aspect, allowing the policy owner to name primary and contingent beneficiaries who will receive the death benefit. The policy owner can typically change these designations at any time, provided they retain that right. The policy owner is also responsible for making timely premium payments to keep the policy in force.

If the insurable interest relationship changes or ceases after the policy has been issued, the policy generally remains valid, as insurable interest is typically required only at the time of policy inception. Life insurance death benefits are generally not subject to income tax for the beneficiary. However, if the death benefit is received in installments, any interest earned on those installments may be taxable.