Can You Get Life Insurance on Someone Else?

It is possible to obtain a life insurance policy on another individual, provided a specific legal condition known as “insurable interest” is met. This requirement ensures the policyholder has a legitimate financial or emotional stake in the continued life of the insured person. Insurable interest helps prevent policies from being used for speculative purposes or to encourage harm. This article explains what insurable interest entails, outlines common relationships where it exists, details the application process and consent, and describes the repercussions of lacking this requirement.

The Concept of Insurable Interest

Insurable interest is a principle in insurance that requires the policyholder to have a legitimate financial stake or interest in the life of the person being insured. This means the policyholder would suffer a financial loss or emotional hardship if the insured individual were to pass away. This requirement prevents life insurance from being used as a wagering contract, where individuals might profit from the death of someone with no genuine connection.

This principle ensures life insurance provides financial protection rather than enabling speculative gains. For instance, a business owner has an insurable interest in its continued operation, just as a family has an insurable interest in the primary income earner. Insurable interest must exist when the policy is purchased. However, it does not need to continue for the entire policy life; if the relationship changes after issuance, the policy typically remains valid.

The interest can stem from various connections, including financial dependency, shared debts, or business relationships. For example, a financially dependent person has an insurable interest in that person’s life. This requirement helps maintain the integrity of the insurance system by aligning the policyholder’s financial well-being with the insured’s continued survival.

Common Relationships for Insurable Interest

Insurable interest arises in relationships where a clear financial or emotional connection exists. Spouses and domestic partners have an automatic insurable interest in each other due to shared financial responsibilities, assets, and potential hardship from loss of income or services. This interdependency makes their continued lives mutually significant for financial stability.

Parents hold an insurable interest in their children, particularly minor children, to cover potential future expenses or mitigate the financial impact of a child’s loss. Adult children may also have an insurable interest in their parents, especially if they provide financial support or anticipate end-of-life expenses. These relationships reflect a natural expectation of financial or emotional support.

Business relationships establish insurable interest. Business partners insure each other to protect against financial disruption caused by a partner’s death, ensuring continuity of operations or facilitating buy-out agreements. Companies may also take out “key person” insurance on employees whose specialized skills or contributions are important to the business’s revenue generation, mitigating the financial impact of their unexpected absence.

Creditors have an insurable interest in their debtors, up to the amount of the outstanding loan or financial obligation. This protects the creditor from financial loss if the debtor passes away before repaying the debt. Other relationships, such as grandparents and grandchildren, or even siblings, can establish insurable interest if there is a demonstrable financial dependency or a clear financial impact from the loss.

The Application Process and Consent

Obtaining a life insurance policy on someone else requires an application process, with the insured person’s knowledge and consent being crucial. The individual whose life is to be insured must be fully aware of the application and needs to sign the necessary forms. This signature serves as formal acknowledgment and agreement to the policy being taken out on their life.

The insured person will also need to participate in the underwriting process, which includes providing personal information such as medical history, lifestyle details, and sometimes undergoing a medical examination. This information is important for the insurer to accurately assess the risk and determine premium rates. Without their cooperation, it is not possible to complete the application.

Insurers require this direct involvement to prevent fraud and ensure the policy is legitimate. Attempting to obtain a policy on someone secretly, or forging signatures, constitutes insurance fraud and carries legal penalties. The process involves submitting the application to the insurer, followed by a review and approval phase, and then policy issuance once all requirements are met.

Consequences of Lacking Insurable Interest

If a life insurance policy is obtained without valid insurable interest, it is considered void from its inception. This means the policy is legally invalid as if it never existed. The requirement for insurable interest is a principle that upholds the integrity of insurance contracts.

If a policy is found to lack insurable interest, insurers will deny any claims, meaning beneficiaries would not receive the death benefit. Premiums paid for such a void policy may not be recoverable, or only a portion might be returned, leading to financial loss for the policyholder.

This strict enforcement prevents individuals from using life insurance for speculative purposes and deters illicit activities. The absence of insurable interest undermines the legal basis of the contract, making it unenforceable and exposing all parties to financial and legal repercussions.