How to Take a Life Insurance Policy Out on Someone

Life insurance offers financial protection to designated beneficiaries upon the death of the insured individual. While most people secure policies on their own lives, it is also possible to obtain life insurance on another person. This process involves specific requirements and procedures, ensuring the policy serves its intended purpose of financial protection rather than speculative gain. Understanding these prerequisites is essential for anyone considering such a policy.

Establishing Insurable Interest

A fundamental requirement for taking out a life insurance policy on someone else is establishing “insurable interest.” This legal concept means the policyholder would experience a legitimate financial or emotional loss if the insured person were to pass away. Insurable interest prevents the use of life insurance for unethical or speculative purposes, such as wagering on someone’s life. Without this interest, an insurance policy cannot be issued.

Insurable interest is recognized in several relationships. Spouses have an insurable interest in each other because their financial well-being is often intertwined. Parents possess an insurable interest in their minor children, and adult children may have an insurable interest in aging parents, especially if financially dependent or responsible for potential end-of-life costs. Business partners commonly have insurable interest in one another, as a partner’s death could lead to significant financial disruption, and creditors may also hold an insurable interest in debtors, limited to the amount of the outstanding loan.

Insurable interest must exist at the time the policy is purchased, not necessarily at the time of a claim. Proof of insurable interest is a standard part of the initial life insurance application process. Insurers may request financial statements, tax records, loan agreements, or documentation of business organization to verify this connection. If insurable interest is not adequately demonstrated, the application will likely be denied.

Preparing for the Application

Before submitting a life insurance application for another person, obtaining their explicit consent is a non-negotiable step. It is illegal to purchase life insurance on someone without their knowledge and agreement, with very limited exceptions for minor children. The proposed insured must actively participate in the application process, often signing forms to grant permission for the insurer to collect their personal information. This consent ensures transparency and prevents potential insurance fraud.

During this phase, various personal and financial details about the proposed insured must be gathered. This includes their full legal name, date of birth, Social Security number, and current occupation. Comprehensive medical history is also required, encompassing details about past and present health conditions, prescription medications, and family medical history. Lifestyle information, such as hobbies, smoking habits, and travel plans, also contributes to the overall risk assessment.

The insurer will use this data to assess the risk associated with insuring the individual and to determine eligibility and potential premium rates. Organizing all necessary documentation and information beforehand streamlines the application process.

Submitting the Policy Application

Once all necessary information and explicit consent from the proposed insured have been secured, the formal application for the life insurance policy can proceed. Applications can be submitted through various channels, including online portals, directly with an insurance agent, or via paper forms. The submission marks the beginning of the insurer’s comprehensive evaluation process.

A common and often required part of this process is a medical examination for the proposed insured. This exam, usually paid for by the insurance company, involves a paramedical professional collecting vital signs, height, weight, and samples such as blood and urine. The medical exam provides the insurer with current health data to supplement the medical history provided in the application. Some policies offer “fluidless” or “accelerated underwriting,” which may bypass the medical exam, often relying on algorithms and existing health data. These options may have higher premiums or lower coverage amounts.

Following application submission and any required medical exams, the policy enters the underwriting phase. Underwriting is the process where the insurance company assesses the risk of insuring the individual and determines the terms of coverage and premium rates. Underwriters review all collected data, including personal and family medical history, lifestyle, occupation, and financial information. This evaluation classifies the proposed insured into a risk category, directly impacting the final premium rates; healthier individuals receive more favorable rates. The entire underwriting process can take several weeks, though some accelerated options may provide quicker decisions.

Managing the Policy After Approval

Upon approval and issuance of the life insurance policy, the policyholder receives the official policy documents. Review these documents carefully to understand all terms, conditions, and riders. These documents detail the coverage amount, premium schedule, and any specific clauses related to the policy.

An ongoing responsibility for the policyholder is the timely payment of premiums to keep the policy in force. Failure to pay premiums can lead to the lapse of the policy, resulting in the loss of coverage. The policyholder maintains control over the policy, including the ability to make changes to beneficiary designations.

Beneficiary designations are a key aspect of policy management. The policyholder names the individual(s) or entity who will receive the death benefit. While insurable interest is required to initially obtain a policy on someone else, the beneficiary does not need to prove insurable interest if the policy owner already has it. Review and update beneficiary designations periodically, especially after significant life events, to ensure the policy proceeds will be distributed according to current wishes.