Can You Take Out Your Own Life Insurance?

Yes, an individual can indeed take out their own life insurance policy, a common practice for financial planning and protection. Life insurance serves as a financial safeguard, providing a death benefit to designated beneficiaries upon the insured’s passing. This benefit can help cover various financial needs, from replacing lost income to settling debts or funding future expenses. This article guides you through obtaining and managing your own life insurance, detailing the roles involved, application steps, and ongoing policy management.

Understanding Policy Participants and Insurable Interest

A life insurance policy involves several distinct roles. The “policy owner” is the individual or entity who purchases the policy, pays the premiums, and controls its terms. The “insured” is the person whose life is covered by the policy; the death benefit is paid out upon their passing. The “beneficiary” is the individual or entity designated to receive the death benefit when the insured dies.

A fundamental concept in life insurance is “insurable interest,” which requires the policy owner to demonstrate a legitimate financial or emotional stake in the life of the insured. This requirement prevents the use of life insurance for speculative purposes. When you purchase life insurance on your own life, insurable interest is automatically established.

When insuring another person, insurable interest typically exists if their death would cause a direct financial loss or hardship to the policy owner. Common examples of relationships where insurable interest is recognized include spouses, parents and children, business partners, and creditors insuring a debtor.

For family relationships, insurable interest can be based on emotional connection as well as financial dependence. In business contexts, a company may have insurable interest in a key employee or partner whose death would impact the business’s operations or finances. Proof of insurable interest, such as marriage certificates, birth certificates, or business agreements, may be required during the application process.

The Application and Underwriting Process

Obtaining a life insurance policy involves a structured application and underwriting process. The initial step involves gathering information from the applicant, including personal details like name, address, date of birth, and Social Security number. Applicants also provide financial information, such as income and net worth, to justify the requested coverage amount.

The application focuses on medical history and lifestyle choices. Applicants detail their medical history, including diagnoses, medications, and doctor information. Family medical history is also requested to identify hereditary health risks. Lifestyle questions cover habits such as smoking or alcohol consumption, and participation in high-risk hobbies like skydiving or international travel.

Many policies require a medical examination, arranged and paid for by the insurer. This exam is similar to a routine physical. It usually includes measurements of height, weight, blood pressure, and pulse, along with collection of blood and urine samples. These samples are tested for health indicators, including cholesterol, blood sugar levels, liver and kidney function, and the presence of nicotine or drugs. For older applicants or higher coverage amounts, an electrocardiogram (EKG) or treadmill stress test might be required.

Information collected undergoes an “underwriting review.” Underwriters assess the risk presented by the applicant. They consult databases, such as the Medical Information Bureau (MIB), which maintains coded information about previous applications and medical conditions to prevent fraud. Prescription history is also checked to corroborate disclosed medical information.

Based on this review, the underwriter determines eligibility and sets the premium rate; healthier applicants generally receive lower rates. The insurer communicates their decision, offering a policy with specific terms and a premium for acceptance.

Managing Your Life Insurance Policy

Once issued, ongoing management is necessary to keep coverage active and aligned with financial objectives. A primary responsibility is timely premium payments. Policies require consistent payments (monthly, quarterly, semi-annually, or annually) to remain in force. Failing to pay premiums can lead to policy lapse, ending coverage and preventing beneficiaries from receiving a death benefit.

Most policies include a “grace period” (30 to 90 days) during which a missed payment can be made without termination. During this period, coverage remains active. If payment is not received by the end of the grace period, the policy may lapse, resulting in loss of coverage. Some lapsed policies can be reinstated, often requiring overdue premiums with interest and, depending on time elapsed, a new medical assessment.

Periodic review and updates are important, particularly after major life events. Marriage, the birth of a child, divorce, or significant changes in financial status are reasons to reassess coverage needs. An increase in dependents or debt may necessitate higher coverage.

Updating beneficiaries is a common task, ensuring the death benefit is paid to intended individuals or entities. Policy owners can change beneficiaries by contacting their insurer and completing forms. Communicate with the insurance company for administrative tasks, policy questions, or to report personal information changes.