Buying Life Insurance on Someone Else
Updated: Oct 10
Can You Get Life Insurance on Anyone? No, you cant buy life insurance for any random stranger on the street. And why would you want to? Most people want to buy life insurance for close family members. To do this, you must fulfill two concrete requirements:
Insurable interest - To buy life insurance on someone else, you have to be able to prove to the insurance company that you would suffer a financial loss if this person dies. In other words, you have to prove that you will benefit financially if this person lives. Insurable interest is crucial in order to avoid devious murder-mystery-like plots of buying life insurance for someone else and then having that person killed.
Consent - You must have consent from the person you want to buy life insurance for. In other words, the purchase has to be something youve discussed, and the person youre buying for has to agree to provide all of his or her medical information, and in most cases, undergo a life insurance medical exam.
Who Can You Buy Life Insurance For? The people you can buy life insurance for include:
A Spouse (Current and Former) Its easy to understand why you would want to buy life insurance for a spouse, especially if he or she is the main breadwinner. Even buying life insurance for a spouse whos the primary caretaker of children and homemaker is a smart financial move, since those services, when outsourced, can cost thousands of dollars a month. Buying life insurance for a former spouse is also common, especially if children are involved. If youre a parent who receives child support payments, you may want to insure the life of your ex, who is making those payments. In fact, some divorce settlements can only be finalized if life insurance policies are in place. When you buy life insurance for a current or former spouse, that spouse will need to sign the life insurance application, and of course, youll need to prove insurable interest.
Business PartnersBusiness partners often sign a buy-sell agreement, a legally binding document that sets the terms of what should happen should one partner die. Buy-sell agreements are often backed by life insurance policies. Each partner purchases a life insurance policy on the other and makes themself the beneficiary. The death benefit usually goes toward buying out the deceased partners share of the business. According to the premise of insurable interest, buying a policy for the other is allowed since each partner really has a lot to lose if their other partner dies.
Key Employees Most business owners dont buy life insurance for every employee, but key person insurance is designed specifically for employees who are crucial to the business operation. The key person can be the owner, top salesman, or investor anyone whose death would cause a major blow to the company. Key person insurance is usually paid for by the company, not the owner, but as always, the employee must consent to the purchase of this insurance and must provide the necessary information for the application.
Children Buying life insurance for a child is a little different than buying for another adult. Parents or legal guardians can purchase a life insurance policy on a child, but the policy is in the adults name. Why would someone do this? In most cases, parents buy life insurance on a child to ensure future insurability. In other words, if you buy life insurance at a childs young age, before they develop any illnesses, you guarantee that your child will have coverage at a later date (when they become college students, for example). For example, since the COVID pandemic, some parents decided to buy life insurance for their children since the effects of the virus are so unknown. They wanted to secure coverage for the future. In addition to securing future coverage, buying life insurance for a child locks in low rates and doesnt require a medical exam. The only type of life insurance that can be bought for a child is whole, which has no expiration date. Term life insurance cant be purchased for a child, though adults can buy it and add child riders. This Forbes article presents an excellent view of the pros and cons of buying life insurance for a child.
Parents At the other end of the spectrum, there are those who want to take out life insurance policies on their parents. In many cases, policies are taken out to cover the cost of funeral and burial/cremation expenses, which can easily reach $10,000. In other cases, a parent might have outstanding loans, and taking out a life insurance policy will ensure that the loans dont get passed to their adult children. In the above cases, final expense insurance or other types of whole insurance will suffice. Another type of life insurance you can buy for your parents is a survivorship policy, less pleasantly known as second-to-die life insurance. This type of policy covers two people, and the payout is only made once the second insured person dies. Survivorship insurance is typically used as an estate planning tool for wealthy couples.
Siblings and Friends A rarer, but still possible, case is if you want to buy life insurance for a sibling or friend. For example, if a sibling or friend is the primary caretaker of an elderly or disabled parent, and their death would result in a serious financial burden to you (as long-term care is notoriously expensive), you might consider taking out a life insurance policy on them. As always, the person youre buying for needs to agree to the policy and for you to be named as the beneficiary.
How to Buy Life Insurance on Someone Else Buying life insurance on someone else isnt a decision you make on your own. That person needs to consent to the actual idea and then be an active partner in the application process. Since that person will be the one who goes through the underwriting process, theyll need to fill out their information, including answering questions about their health, medical history, income, and more. They will also need to undergo a life insurance medical exam unless youre buying a no exam life insurance policy. The person youre buying for (not including children under the age of 18) will need to sign the application, not you. Youre merely financing the monthly premiums and being named as the beneficiary. And just like when you buy life insurance for yourself, when you buy for someone else you both need to decide which type of policy is best and then shop around for quotes. Sproutt insurance advisors can provide excellent guidance regarding types of policies, and you can get free quotes on our website.
The Unholy Trinity When purchasing a policy on someone else, it is very important to make sure that the owner, insured, and beneficiary are not three different people. Two of the three should be the same, and having the insured and beneficiary does really make sense, so the owner should also be the beneficiary. If a policy has a different owner, insured and beneficiary, it will lose its tax-free status and will then be considered a taxable gift. You may appoint a secondary owner and contingent beneficiary so that if something happens to the original owner, who is also the beneficiary, this secondary individual will be able to take the reins. A common example of this would be when an older grandparent purchases a policy for a young grandchild. There is a chance that the grandchild will not yet be 18 at the time of the grandparents death. Therefore, the parent can be appointed as the owner until they eventually pass the policy onto the child.
When Can You Buy Life Insurance on Someone Else? You can only buy life insurance on someone else if you have:
Received that persons consent - The consent will come in the form of the person filling out the application, signing it, and undergoing a medical exam
You can prove insurable interest - When you can prove to the insurance company that you stand to suffer a financial loss if that person dies