Yes, you can take out life insurance on someone else in certain situations. If you’re considering taking out life insurance on someone else, there are two instances when it is permissible:
- If you get their consent to take out life insurance on them.
- If you have proof of insurable interest, which means their death would cause financial hardship in your life.
You can take life insurance out on anyone, but only if you have an insurable interest in the person you want to buy life insurance on.
You cannot get a life insurance policy on someone without them knowing. The insured must give consent and sign the application for the policy to be approved and issued.
When you buy life insurance for someone else, you become the payor and are responsible for paying the premiums to insure the other person.
Who Can You Take Out a Life Insurance Policy On?
You can take out life insurance on anyone you have an insurable interest in. While buying life insurance on a family member is most common, there are other times when buying life insurance for someone else makes sense. Here are some of the people you might have an insurable interest in:
Your spouse or life partner
In scenarios in which one spouse or partner is the breadwinner, it makes sense to buy life insurance on them and make the other partner the beneficiary. The surviving spouse can use the death benefit as income replacement. Insuring the other partner can also allow the breadwinning survivor to maintain their employment and use the death benefit to pay for child care, home care and other services that the spouse handled while alive.
Your former spouse or life partner
If you depend on your former spouse or partner for child care, income or other financial needs, you can buy life insurance on them and name yourself or your children as the beneficiary. Sometimes, a judge will also include a life insurance policy in a court order as part of the divorce settlement in addition to child support, alimony and other financial requirements.
Your minor child
Although not typically recommended, parents and grandparents may wish to take out whole life insurance on a minor child. While children can’t provide financial support to their elders, the death benefit can help pay for a funeral and final expenses or provide the ability to grieve without financial hardship. You could buy a limited pay whole life policy, pay it in full, then gift it to the child as an adult. A better and more cost-effective solution may be adding the child to the parent’s or grandparent’s life insurance policy with a child term rider instead.
Your adult child
Parents or grandparents who co-sign on private loans for their children or grandchildren may consider taking out a life insurance policy to pay off loans if the adult child dies prematurely. If there is family medical history that could affect the adult child’s insurability, a parent or grandparent may wish to buy a policy to start the adult child off until they are financially secure enough to take over ownership and continue paying the policy.
Adult children may want to take out life insurance on their parents if they co-sign a loan for them or expect to pay estate taxes on a substantial inheritance. A survivorship life insurance policy is a good way to pay estate taxes. A small final expense or whole life policy can cover funeral costs or final expenses for your parents. Purchasing a life insurance policy with long-term care benefits can also help you shoulder the rising costs of long-term care if needed in the future.
If a sibling takes care of one or both parents, taking out a life insurance policy on the sibling may be wise. You can name yourself as the beneficiary and use the proceeds to pay for a caretaker for the parent or parents if your sibling dies before your parent or parents do.
Your business partner
If you own a business with a partner, you likely have a buy-sell agreement that dictates what happens to the deceased partner’s share in the business if they die. Business partners can take out life insurance on each other, naming themselves as the beneficiary. The death benefit proceeds can then be used to buy out the deceased partner’s business share from their surviving family member.
A key person in your business
Businesses usually have a key person or employee who is instrumental in keeping your business running successfully. The business can buy key man insurance, or key employee life insurance, and name the business as the beneficiary. The proceeds can fund recruitment, replace lost sales or protect partnership or shareholder interests.
Regardless of the life insurance buyer's relationship with the insured, there must be an insurable interest to take a life insurance policy out on someone. You cannot get a life insurance policy on someone without them knowing, as they have to be part of the process. The proposed insured has to sign the application and take part in the underwriting process for the policy to be approved and issued.
Having an insurable interest in someone else means you would experience hardship or financial loss if they were to die. The policy owner can use the death benefit proceeds to recoup their loss. To take out a life insurance policy on anyone else, you must prove insurable interest.
Proving insurable interest can include verifying both parties’ identification and their relationship through a phone interview or by producing written documentation like a buy-sell agreement. Even with proof of insurable interest, the proposed insured must consent to and sign the application. A parent-minor child relationship is typically the only exception since a minor child cannot consent to a life insurance contract.
Who Can’t You Take Out a Life Insurance Policy On?
Although you can take out a life insurance policy on anyone, potentially, there are exceptions. If someone doesn’t consent to the life insurance policy, you can’t initiate it. You also cannot take out a life insurance policy on someone else without proving that you have an insurable interest. If both of these parameters are not satisfied, then you can’t take out a life insurance policy on that person.
Can You Get a Life Insurance Policy on Someone Without Them Knowing?
You need permission to get life insurance on someone, so you cannot get a life insurance policy without them knowing. The proposed insured party must take part in the life insurance process, from signing a consent form as part of the application to verifying medical and personal history during the underwriting process. If a medical exam is required, the proposed insured will have to complete it.
Although life insurance laws can vary by state, every state requires the insured to give consent in writing before the process can begin. The only exception is when a parent buys life insurance for their minor child. Since a minor cannot consent to a contract, the parent can buy life insurance after proving they are the legal guardian.
Consequences of Getting a Life Insurance Policy on Someone Without Their Consent
Not only is it illegal to get a life insurance policy on someone without their consent, but it’s also considered insurance fraud. The consequences of getting life insurance without someone’s knowledge can include:
- Denied claims: The insurance company can deny a death benefit claim if it finds the insured did not consent during the application process.
- Canceled policies: If the insurer discovers there was no consent while the policy is active, they can cancel the policy without refunding any premiums.
- Prosecution: The insurer can take you to court and prosecute you for committing insurance fraud, which could mean fines or jail time.
How Do You Take Out a Life Insurance Policy on Someone Else?
Without taking the proper steps to take out a life insurance policy for someone else, the policy could be voided or canceled. After getting consent, you should determine the type of life insurance you want to buy, get quotes, provide insurable interest proof and then buy the policy as the last step.
Get consent from the person you want to insure.
Getting consent from the proposed insured is the first step. Without consent, you can’t finalize a life insurance policy. Speak with the person you want to insure, explain why you want to take out life insurance on them and ask their permission to do so. Explain the application process and their role, from signing the application to completing a telephone interview and a medical exam (if applicable). Once you’ve gotten permission, move on to the next step.
Select the type of life insurance policy you’ll get.
Calculate the amount of life insurance you will need to buy, then select the life insurance policy type that’s best for you. A permanent life insurance policy may be best if you only need a small amount of coverage for final expenses or want access to cash value. If you need a substantial amount to pay for temporary needs, like replacing income or paying off a mortgage, term life insurance may be the better choice. Comparing life insurance policies, their benefits and drawbacks can help you find the policy type that will meet your needs and budget.
Get quotes from various life insurance companies.
Now that you know what type of life insurance policy you need and the amount you’re looking for, it’s time to get quotes. Comparing quotes from several companies can help you find the best policy and price. Each life insurance company has its own rates and policy details, so comparing the same policy type and coverage amount can help identify which carrier will best meet your goals for life insurance.
Provide proof of insurable interest.
Once you know which life insurance company you want to go with, the application is the next step. Since you’re taking out life insurance on someone else, you need to prove you have an insurable interest. The agent will ask about your relationship and request documentation to prove it, which may involve both you and the proposed insured providing identification and verification of your relationship. The proposed insured may have to answer questions about the relationship and the reason you’re taking out life insurance on them. They can also confirm their consent and knowledge of the policy and the coverage amount, which they will also sign off on.
Purchase the life insurance policy.
Once you have satisfied the insurable interest requirement, you will complete the application and the underwriting process. The proposed insured will have to verify their personal and medical history and may be required to complete a medical exam. After completing the required steps, the insurer will review the entire case and approve or deny the policy. If approved, you will complete the life insurance policy purchase with a premium payment.
Investors will sometimes try to circumvent the insurable interest rule. This arrangement is called stranger-owned life insurance (STOLI). Not only is this unethical, but it’s also illegal because the policy owner does not have an insurable interest in the insured or consent to take out life insurance on them.
Stranger-owned life insurance (STOLI) is a life insurance policy owned by a third party, typically an investor, who has no insurable interest in the insured. The buyer takes out a life insurance policy on a stranger for investing or speculation purposes rather than financial support as the beneficiary.
This type of purchase is illegal and considered insurance fraud. A STOLI is not the same as a viatical, a life insurance settlement between the insured policy owner and a third party. The third party takes over all future premiums and becomes the policy's sole beneficiary. This legal arrangement is typically marketed to policyholders without beneficiaries or with a terminal illness and no living benefits policy rider.
STOLI differs from selling a life insurance policy you own. In some instances, like being unable to afford premium payments or no longer needing the policy, it can make sense to sell a policy, though there are also possible drawbacks to consider.
Why Should You Take Out a Life Insurance Policy on Someone Else?
In most circumstances, people take out life insurance policies on themselves and name someone else as the beneficiary. But you might take out a life insurance policy on someone else for several reasons.
Financial protection of family members.
Life insurance is a great way to protect survivors financially. It makes sense to want to protect your family from the financial repercussions of someone’s death. Taking out life insurance on a family member can ensure the surviving relatives won’t be financially devastated if a breadwinner or caregiver passes away.
Security of business continuity.
You’ve put in the work to grow your business. The last thing you want is to lose a key person crucial to its success. Since you can’t predict when a key employee or partner will pass away, getting life insurance for them can help ensure the business will continue to thrive in their absence.
Guaranteed future insurance coverage.
You could be one illness away from eliminating your chances of being approved for life insurance coverage. By getting life insurance now, especially for a minor child or young adult, you can lock in their insurability for life. Not only can you guarantee they’ll have life insurance coverage in the future, but you can also guarantee future coverage increases with a guaranteed insurability rider (if applicable).
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Frequently Asked Questions
Sometimes, taking out life insurance on someone else makes sense. Here are answers to the most common questions about when you can take out a life insurance policy on someone else.
About Mandy Sleight, Licensed Insurance Agent