If secretly taking out a life insurance policy on someone else shortly before that person meets an untimely end sounds like something that only happens in the movies, you’d be right. Insurers won’t let you buy a policy for another adult without that person’s knowledge.
That doesn’t mean buying life insurance for someone else is completely off the table. it is legal to buy life insurance for another person in certain situations. and it may make sense to do so, without being shady at all.
how to take out life insurance for someone else
You can’t take out a life insurance policy on a stranger or even someone you know casually. “You have to have an insurable interest in that person,” says Dennis Lavoy, founder of Telos Financial in Michigan. that is one of the requirements to buy a policy for another person. the other is consent.
insurable interest: To buy a policy for another person, you must be able to show the life insurance company that you would suffer financially if that person died. To put it bluntly, insurers don’t want to incentivize someone to shorten someone else’s life. so they want to see that you benefit from that person being alive, says lavoy.
Insured Consent: The person you are purchasing the policy on, the insured, must participate in the application process. He or she will have to go through the underwriting process, which involves answering questions and, in most cases, taking a life insurance medical exam. the insured will also have to sign the application, says lavoy. The exception to this rule is if she is purchasing life insurance for a child (more on that below).
who can you buy life insurance for?
In certain situations, it may make sense to purchase a life insurance policy for someone else. these are common scenarios where the person you want to insure would be an insurable interest for you.
There are a few reasons why one spouse might want to purchase a life insurance policy for the other spouse. the most practical reason would be if one spouse is the breadwinner and the other spouse has no income of their own to pay for a policy. If the breadwinner is paying for the policy, he or she may also want to own the policy, Lavoy says.
To be clear, you cannot purchase a life insurance policy for a spouse without your spouse knowing and participating,
says lavoy. your spouse will have to go through the underwriting process and sign the policy as an insured. Even if you purchased a simplified issue life insurance policy that didn’t require a medical exam, your spouse would still have to sign the policy.
your business partner
It is common for business partners to have a buy-sell agreement that stipulates what will happen to the business if something happens to either of them.
“Think of it like a prenuptial agreement for business partners,” says Henry Hoang, founder of Bright Heritage Advisors and Bright Life Insurance in California. Life insurance is often used to finance the purchase agreement if one of the partners dies.
Each partner purchases a life insurance policy for the other to receive a death benefit payment if the partner dies. that payment can be used to purchase the deceased partner’s share of the business from a surviving spouse, children, or other family members.
a key employee in your business
If you own a business, you can purchase what is known as key person or key employee insurance to insure an employee who contributes significantly to the business.
“If a superstar salesperson who generates most of the sales were to die, it would be a huge blow to the company’s revenue,” says hoang. “A key person policy will help business owners cover business liabilities while they find someone new to fill the role.”
Typically, the company (rather than the business owner) buys the policy, pays the premiums, and is the beneficiary, according to the Insurance Information Institute. the employee must consent to a policy being purchased and must go through the underwriting process.
You can buy life insurance for a child if you are the child’s parent, grandparent, or legal guardian and you name yourself as the beneficiary. the goal is not to provide a financial safety net for you because you may not be dependent on your child for financial support. Instead, buying life insurance for a child guarantees that the child will be insurable even if she develops a health condition later in life.
Children’s life insurance policies, which are permanent life insurance policies, also build cash value that children can access later in life if they choose. and if the child dies, the policy payment can cover the costs of the funeral.
Unlike other situations where you buy life insurance for someone else, children don’t have to take a medical exam or sign the policy. it can be quick and easy to buy a policy for a child. however, it may be more affordable to add coverage for a child to your own life insurance policy by purchasing a rider.
your former spouse
In reality, it’s more common for people to buy a life insurance policy for a former spouse than for a current spouse, says lavoy. if the divorced spouse receives spousal support or child support, he or she has a very valid insurable interest in the ex-spouse providing that support.
In fact, the court can order the purchase of life insurance during the divorce process, says lavoy.
Buying an insurance policy for your parents could make sense in a variety of situations. If they don’t have insurance policies of their own, you may want to purchase policies to help cover funeral costs and final expenses. If you’re a co-signer on any of your loans, taking out policies on your parents would help you pay off those debts when they die.
It might also be a smart financial decision to buy life insurance with long-term care benefits for your parents if you’re concerned about their ability to pay for any long-term care they may need, hoang says.
If you are inheriting substantial assets that will be subject to estate taxes, a survivor life insurance policy for the parents may provide funds to pay the tax bill.
You may have an insurable interest in a sibling if your sibling is caring for one or both parents, says hoang. If your brother died, you would need to hire someone to take care of your parents if you couldn’t do it yourself. By taking out a policy on your sibling, you could name yourself as the policy beneficiary and get a payment that would help cover the cost of your parents’ care.
get help buying life insurance
Before purchasing a life insurance policy for someone else, it’s best to work with a financial advisor or attorney to determine if this is the right move for your situation. If it makes sense, contact an independent insurance agent to find the right policy. Independent agents work with multiple insurance companies and will know which one has the best policy for the person with the best rate.