Can You Take a Life Insurance Policy on Anyone?
Uncover the fundamental requirements and permissions needed to obtain a life insurance policy on another person.
Life insurance offers significant financial protection to beneficiaries upon the death of the insured. However, taking out a policy on another person requires specific legal and financial conditions. Unlike property insurance, life insurance is designed to prevent financial wagering, necessitating the concept of “insurable interest.”
The Concept of Insurable Interest
Insurable interest is a fundamental principle in life insurance, meaning a legitimate emotional, legal, or financial stake in the insured individual’s continued life. This requirement prevents moral hazards and speculative practices, ensuring individuals cannot profit from the death of strangers. Without this interest, a policy is void from its inception, even if premiums are paid. This principle ensures the policyholder would suffer a genuine loss if the insured were to pass away.
Insurable interest must be verified when the policy is purchased, not at the time of the insured’s death. This safeguard maintains the integrity of the insurance industry, ensuring policies provide financial security. If insurable interest is not demonstrated, an insurer may reject the application.
Establishing Insurable Interest
Establishing insurable interest involves demonstrating a financial or emotional connection where the policyholder would experience hardship from the insured’s passing. Close family relationships, such as spouses, children, and parents, often satisfy this. For instance, a parent typically has an insurable interest in a minor child. Adult children might have one in parents if there is financial dependency or a significant financial strain would result from their death.
Beyond family ties, insurable interest arises in business contexts. Business partners often have an insurable interest in each other, as one’s death could cause substantial financial loss or disrupt operations. Companies may also take out “key person” insurance on essential employees whose skills contribute to profitability. Another common scenario involves creditor-debtor relationships, where a creditor can insure a debtor’s life up to the outstanding debt to recover the loan if the debtor dies.
Obtaining Consent and Necessary Information from the Insured
Even with insurable interest, obtaining a life insurance policy on another adult requires their explicit consent. The insured person must participate in the application process, typically by signing the form. Forging a signature is illegal and can lead to severe penalties.
The insured individual must provide comprehensive personal and medical information to the insurer. This includes their date of birth, occupation, lifestyle habits, and complete medical history. Many policies also require a medical examination, involving samples, readings, and a review of family history. This information allows the insurer to assess risk and determine premium rates. Misrepresentation can lead to claim denial, policy cancellation, or charges of insurance fraud.