But it MUST meet certain criteria. In this article we’ll explore the 17 thingsyou need to know about buying life insurance for someone else including: Getting a life insurance policy.
What Is Insurable Interest and Why Does It Matter?
The purpose of life insurance is to offer financial protection in the case of a lost life.
When that life is lost, the person who suffers financial harm receives a death benefit payout. The key here is that someone must be hurt financially as a result of that death.
Insurable interest means that you would be adversely affected financially in the event of the death of the insured.
So you can’t purchase life insurance on your mail man. Aside from missing their friendly smile, it’s tough to argue that the mail man passing away has any real financial consequences for you.
There are bad people in this world (SHOCKING). If it was legal to just buy insurance policies on anyone, this could lead to intentional harm.
It is illegal for insurance companies to sell policies on someone else without the presence of defined insurable interest.
Generally speaking, the good people in this world value their own lives, and those they know, more than money. An existing relationship and the presence of insurable interest lesson the chance of foul play for insurance payouts.
Bottom Line: A death cannot create personal gain for the beneficiary. If the death negatively impacts the beneficiary then insurable interest exists.
When Is Consent Required?
In order to purchase a policy on someone else, you will need their consent. Might be a little weird to tell your mailman you want to take out $500k on his life and ask him to sign.
Since consent is required, it’s extremely difficult for a policy to be purchased on someone’s life without them knowing.
On top of the consent, most life insurance policies require a medical exam be performed on the insured. Even if they don’t remember signing the application, do you think they’ll notice blood being drawn?
Consent is another check against any bad intentions. Consent must ALWAYS be given by the insured before a policy can be issued.
How to Avoid Doing Anything Fraudulent
Don’t worry unless your intentions are bad. If they are, get off this site and get some help!
Life insurance is a heavily regulated industry. Having both the above mentioned insurable interest and consent makes it virtually impossible for you to do anything wrong. The insurance carriers just won’t allow it.
If even after reading this article you are still worried, consult a trusted independent life insurance professional who can calm your fears and guide you safely.
These safeguards go both ways. You have little to worry about someone else purchasing an insurance policy on you without you knowing about it.
In the rare case that someone is able to sneak a low dollar guaranteed issue policy into place without the other person knowing, this WOULD be fraud. Insurance fraud is serious business and is a felony. Besides that, the policy will be voided because it never should have been in place to begin with.
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9 Situations You Can Buy an Insurance Policy on Someone Else
As long as you can prove insurable interest, it could be anyone (including the mail man).
These are the 9 most common situations where buying a life insurance policy on someone else makes sense. Let’s examine…
Unmarried partners, fiance/fiancee or roommates
Others you need to protect
Anyone who you depend on
1) Spouses or partners
When purchasing life insurance, making sure your spouse or partner is protected is very common. If John buys a policy on himself with his wife Amy as the beneficiary, this is a “normal” policy. If John purchases a policy on Amy with himself as the beneficiary, then he is purchasing it on someone else.
There is very obvious insurable interest here and no issues.
It’s something nobody wants to talk about but it does happen. If you lost a child, the grief would be unbearable. Often times this causes financial injury due to missed time from work and funeral expenses. Therefore, you DO have insurable interest in your own children and can purchase policies on them with yourself as the beneficiary.
The coverage amount will max out at $25,000 to $50,000 with most insurers.
Our Advice: Consider a child rider instead. They are very inexpensive (around $6 per month for 15k coverage). The best part is that they cover all the children in your house under 1 rider. You don’t pay twice for 2 kids.
This rider must be added to an existing policy on one of the parents.
3) Elderly parents
This is not hard to demonstrate insurable interest. Often times children will be responsible for covering their parents funeral expenses and certain debts.
Do your parents watch the kids while you are at work? That would result in an additional financial hardship as you’d now have to find (pay for) a new day care option.
4) Business partners
Often times when a new business starts out, partners may purchase life insurance policies on each other.
If partner A dies, the life insurance will pay partner B and vice versa. Typically the coverage amounts will be equal to each partner’s respective shares in the business. This allows the surviving partner to buy out the heirs of the deceased partner and keep the business moving forward in the surviving partner’s control.
This type of insurance will typically be accompanied by a buy-sell agreement. This is a legal document that states exactly what is to happen should either partner pass away.
5) Key man
A business may have an employee that is so valuable that his/her death would have drastic consequences for the company. This could be the CEO or it could be someone with a unique skill set who would be very hard to replace.
The business can purchase a policy on this “key man”. The business owns and pays the premiums on the policy. It will also be the beneficiary. In the event of the key man’s death, the life insurance proceeds give the business some breathing room. They will need to replace that key employee and recover from any financial setback that was caused by the death.
6) Unmarried partners, fiance/fiancee or roommates
If you are living with someone, it’s not a stretch to claim that their loss would have a financial impact on you. This could be lost rent, mortgage payment, or other bills you will now have to cover if they were gone.
Those who are engaged and living together may also also be able to demonstrate additional insurable interest if they can prove their finances are joined.
7) Others you need to protect
Let’s say you are the godparents to your best friend’s 2 young children. If their parents pass away, this will impact you financially as you’ll now be caring for them. Definite insurable interest in the parents here. You could purchase a policy on them if you choose to.
Another example might be your own kids and grandkids. If something terrible happened to your kids, would you be left caring for the grandchildren? If so, you could purchase a policy on your own children to protect against the financial adversity you’d face.
8) Anyone who you depend on
This could be all sorts of different people. If they are providing you assistance that would impact you financially if you lost it, there may be a case to prove insurable interest in that person.
Maybe you have a successful daughter that pays your rent. Maybe your ex-spouse is required to make child support payments to you. There are many possibilities and scenarios that could apply here.
Bottom Line: If you can prove that you’d encounter financial hardship resulting from the death of a certain person, you are demonstrating insurable interest. You will likely be able to purchase a life insurance policy on that person if you wish.
How Much Insurance Coverage Can You Buy on Another Person?
The first part of insurable interest is the individual on whom you buy the insurance.
The second part is just how much interest is there in that person? This will determine how much insurance you can buy on them. It needs to make sense.
Let’s say you are buying a life insurance policy on your father. You’ll be responsible for funeral and any other final expenses. The insurable interest in him is there, no problem. However, if you try to apply for $1,000,000 in coverage, it’s going to raise red flags because it’s not reasonable.
The amount of insurance coverage you can buy on another person can be no higher than the financial impact the loss of life would have for you.
Transferring of Life Insurance Policies
It is legal to transfer the ownership of a life insurance policy. You can even transfer it to someone that does NOT have insurable interest.
The 1911 supreme court decision (Grisby vs. Russell) states that a policy owner may transfer ownership of a life insurance policy to a 3rd party even if that 3rd party has no insurable interest. This paved the way for the life insurance settlement market.
This is possible because there WAS insurable interest at the time of the initial policy going in force. As we’ve discussed above, if there wasn’t, there would be NO policy.
What If Insurable Interest Changes in the Future?
As long as there was insurable interest when the policy was purchased, it will remain valid and legal even if the relationship or situation changes in the future.
Let’s say you purchased a policy on your ex-spouse because they were giving you alimony payments. Their death would have financial impact to you. Now you remarried (congrats!), and the alimony payments stop.
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Even though the insurable interest no longer exists, you can maintain this policy if you wish. Of course maybe you just stop paying the premiums and cancel it. The point is, it’s your choice.
Can Secret Policies Be Purchased Without the Other Person Knowing?
Murder detective: “We found out that just last month, he took out a $1 million life insurance policy on his wife without her knowing”
This stuff makes for good drama television but it’s hardly reality. Since consent is required and often a medical exam, it’s just not feasible to buy a life insurance policy on another person without them knowing.
On the flip side, you can take comfort that nobody is out there buying secret policies on your own life and waiting to profit from your demise.
The Best Companies for Buying Life Insurance for Someone Else
There aren’t any companies that specialize in this type of insurance but that is a good thing.
It’s important to have options in order to pay the lowest premiums.
Each insurance company has certain underwriting niches that they are strong/weak in. Since you can purchase a life insurance policy on someone else with any carrier, this works in your favor.
The Truth: Most people don’t know all the details of their own health (or at least aren’t honest with the reality).
How well do you know the medical history of the OTHER person you wish to buy insurance on? Assuming you want to pay the lowest premiums, their health rating will be important to you in this process.
Narrowing it down
There are over 800 companies that sell life insurance in the United States. You have seen the ads for the big ones. There are also other lesser known companies who keep their rates low by not focusing on marketing spend.
The simple secret to the lowest rates is to apply at the company that views you (or the person you are buying life insurance for) in the best light. The right company will be different for everyone.
A trusted independent life insurance professional can steer you in the right direction.
There is never a cost to use their service.
Questions on buying life insurance for someone else? I would be happy to help out.