Can You Take Out Insurance on Someone Else?

It is possible to obtain an insurance policy on another individual. This process is governed by “insurable interest,” a fundamental concept in insurance law. This concept ensures policies protect against genuine loss rather than facilitating speculative gain. The rules vary depending on the type of insurance, from life and health to property.

Understanding Insurable Interest

Insurable interest represents the financial or emotional stake one person has in the continued life, health, or property of another, such that their death, illness, or loss would cause a direct, quantifiable financial or emotional hardship to the policyholder. This interest is a foundational principle in insurance, distinguishing legitimate protection from mere gambling. Without it, an insurance contract may be deemed void.

The primary purpose of requiring insurable interest is to prevent moral hazard and speculative activity. Moral hazard arises when an individual stands to gain from the misfortune of another, potentially creating an incentive for harmful actions. By mandating a pre-existing financial or emotional tie, insurance aims to mitigate such risks and ensure that policies are purchased for their protective value.

Common relationships that establish insurable interest include family connections. A spouse has an insurable interest in their partner’s life and health due to shared financial responsibilities and mutual dependency. Parents possess an insurable interest in their minor children, reflecting the financial and emotional support they provide. Adult children may also have an insurable interest in elderly parents if they would incur significant financial burdens, such as care costs or funeral expenses, upon their parent’s passing.

Beyond familial ties, business relationships demonstrate insurable interest. Business partners often have an insurable interest in each other, as the loss of one partner could severely impact the company’s operations and financial stability. A business may also have an insurable interest in a “key person”—an employee whose unique skills or contributions are vital to the company’s profitability and continued existence.

Creditor-debtor relationships also establish insurable interest, allowing a creditor to insure the life of a debtor up to the amount of the outstanding debt. This protects the creditor from financial loss should the debtor pass away before repaying the obligation. For instance, a bank lending money for a mortgage may require a life insurance policy on the borrower, with the bank as a beneficiary, to secure the loan.

Conversely, a casual acquaintance or a stranger without any demonstrable financial or emotional tie would not be considered to have an insurable interest. The absence of a legitimate stake means there is no actual loss to protect against, and allowing such policies could encourage illicit activities. The core principle remains that the policyholder must genuinely stand to suffer a loss if the insured event occurs.

Insurable Interest Across Different Insurance Types

The concept of insurable interest applies across various insurance types, adapting to the specific risks each policy addresses. In life insurance, insurable interest is fundamental. The policy owner, who pays premiums, must have an insurable interest in the insured person’s life at the time the policy is purchased.

A specific concern in life insurance is “stranger-originated life insurance” (STOLI), which is prohibited. STOLI schemes involve individuals with no insurable interest initiating a life insurance policy on another person, often elderly individuals, solely for investment purposes. The policy is sold to a third-party investor who then profits upon the insured’s death. This practice violates the insurable interest principle and is considered illegal in many jurisdictions because it resembles speculative gambling and can raise moral hazard concerns.

In health insurance, the scope of insurable interest is more confined. Individuals can only obtain health insurance for themselves, their spouse, and their dependent children. This reflects the direct financial responsibility and care involved in these immediate family relationships. The medical expenses of these individuals directly impact the policyholder.

Employer-provided health insurance is a standard practice where the employer has an insurable interest in the health of their employees and their dependents. A healthy workforce contributes to productivity and reduces absenteeism, directly benefiting the employer. One cannot take out a health insurance policy on a non-dependent adult, such as a friend or distant relative, as there is no direct financial responsibility for their medical care.

For property insurance, such as home or auto policies, insurable interest is tied to ownership, possession, or a financial stake in the asset. A homeowner has an insurable interest in their house because its damage or destruction would result in a direct financial loss. A car owner has an insurable interest in their vehicle. Mortgage lenders also possess an insurable interest in the properties they finance, as the property serves as collateral for the loan.

Renters also have an insurable interest in their personal belongings within a rented property, which is why renters insurance is available. You cannot insure property you do not own, possess, or for which you have no financial responsibility. The principle ensures that claims are made only by those who would suffer a genuine financial setback from the property’s loss or damage.

Key Requirements and Process for Insuring Another Person

When seeking to insure another individual, the consent of the insured person is a requirement for life and health insurance policies. This consent is demonstrated by the insured person signing the application form and, if required, undergoing a medical examination. This safeguard protects privacy, prevents fraud, and ensures the insured individual is aware of and agrees to the coverage. Without explicit consent, an insurer will reject the application, as it could open the door to illicit activities.

For property insurance, consent from a third party is not required unless that party has an ownership stake in the property. For instance, if you are insuring your own home, you do not need consent from your neighbor. If you are a co-owner of a property, all owners might need to be involved in the insurance application process, depending on the policy structure and insurer’s requirements.

Insurance companies require comprehensive information about the proposed insured individual during the application process. For life and health policies, this includes personal details such as name, date of birth, and social security number. Medical history, including past diagnoses, treatments, and current health status, is important for underwriting. Financial information may also be requested to substantiate the insurable interest, such as income statements or debt obligations.

Proving insurable interest to the insurance company is a step. This involves providing documentation that demonstrates the financial or emotional relationship between the policy owner and the insured. For spousal relationships, a marriage certificate suffices. For business relationships, partnership agreements, corporate resolutions, or employment contracts can serve as evidence. Creditor-debtor relationships are evidenced by loan agreements or other debt instruments. The insurer reviews these documents to confirm the legitimacy of the insurable interest.

The application process involves the policy owner initiating the request for coverage. The policy owner is responsible for paying the premiums and controls the policy, including the ability to name beneficiaries. The beneficiary, the individual or entity designated to receive the policy proceeds, must also have a valid insurable interest or be designated by someone who has. For instance, in a key-person policy, the business is often both the policy owner and the beneficiary.

The underwriting process is the insurance company’s method of assessing the risk associated with the insured individual and verifying all provided information. Underwriters review the application, medical records, financial data, and any documentation proving insurable interest. This thorough review ensures that the policy aligns with the insurer’s risk appetite and regulatory requirements. Only after this verification is complete will the policy be issued.