Can You Take Out Life Insurance on Someone Else?

Life insurance provides a financial benefit to designated individuals or entities upon the death of the insured person. You can take out a life insurance policy on someone else, but this involves specific legal and practical requirements. A foundational concept, “insurable interest,” must be satisfied for such a policy to be valid. This article explains these conditions and the process of obtaining and managing a policy on another individual.

The Requirement of Insurable Interest

Insurable interest is a fundamental legal principle in life insurance. It requires the policy owner to expect financial or emotional loss if the insured person dies. This ensures policies protect against financial hardship, preventing fraud or moral hazard where individuals might profit without a legitimate connection.

Common relationships establishing insurable interest include spouses or domestic partners, as one’s death can lead to financial strain. For instance, a working parent might insure a stay-at-home parent, recognizing the financial impact of losing household contributions. Parents have an insurable interest in minor children, and adult children in parents, particularly if there is a demonstrable financial dependency or shared financial responsibilities, such as covering end-of-life expenses.

In business, partners often have an insurable interest in one another, known as key person insurance. A partner’s death could cause substantial financial harm, making such policies a means to ensure continuity. Creditor-debtor relationships also establish insurable interest, allowing a creditor to insure a debtor up to the outstanding debt. This principle extends to anyone who would suffer a financial setback or increased responsibility upon the insured’s passing.

Insurable interest must exist at the time the policy is originally taken out. While circumstances may change over time, the initial establishment of this interest is sufficient for the policy to remain valid. Mere friendship or a casual acquaintance does not meet the criteria for establishing insurable interest, as these relationships lack the necessary financial or legal interdependence.

Steps to Obtain a Policy on Someone Else

Obtaining a life insurance policy on someone else begins with preparatory steps that ensure legal and ethical compliance. The person whose life is being insured must provide explicit, written consent for the policy to be valid. This is legally necessary due to privacy considerations and the implications of a life insurance contract. The insured individual will be required to sign the application forms themselves.

The application process involves gathering comprehensive information about the insured. This includes their full name, date of birth, Social Security Number, detailed medical history, current health status, and lifestyle information such as smoking habits or dangerous hobbies. This data is essential for the insurance company to accurately assess the risk. During this phase, discuss with the insured the type of policy desired (term or permanent) and the appropriate coverage amount.

Once these preparatory steps are complete, the applicant, who has the insurable interest, submits the application to the insurance company and becomes the policy owner. The insured person’s direct involvement continues throughout the process, requiring them to complete health questionnaires and potentially undergo a medical examination. Insurers then engage in an underwriting process, evaluating all gathered information and medical results to determine the risk level and set premium rates. Following this assessment, the insurer will either approve the policy, offer it with modified terms, or deny the application.

Managing the Policy

After a life insurance policy on another person is issued, the individual who applied for and took out the policy assumes the role of the policy owner. This ownership grants control and legal rights over the policy. The policy owner can make decisions, including changing beneficiaries, adjusting coverage options, or surrendering the policy for any cash value it may have accumulated, if it is a permanent life insurance policy. This control distinguishes the policy owner from the insured person.

A primary responsibility of the policy owner is to ensure all premium payments are made on time to keep the policy in force. Failure to make these payments can result in the lapse or termination of the policy, meaning the death benefit would not be paid out. The policy owner also designates the beneficiary or beneficiaries who will receive the death benefit upon the insured person’s passing. This can be the policy owner themselves, or another party with a legitimate interest, such as a trust or a business entity.

Maintaining accurate records of the policy, including policy numbers, contact information for the insurer, and beneficiary details, is important. The policy owner should also communicate any significant changes, such as an address change or updated beneficiary information, directly to the insurance company. This ensures that the policy remains properly administered and that the death benefit can be paid out efficiently when the time comes.