Life insurance provides financial security by offsetting at least some of the financial costs left unaddressed when someone dies. Policies you purchase typically cover your own life. But you might want to consider taking out a policy on the life of someone else – a family member, perhaps, or a business partner whose death would deal a financial setback to you or your family.
Not every gift of life insurance coverage is allowed. Whether you can take out a policy on someone else will hinge on whether you have what’s known as an "insurable interest" in them, and whether they approve of you buying the coverage.
Read on for more about those requirements, and for other tips and insights on the legal and practical considerations if you hope to buy a life insurance policy for someone else.
Can you take a life insurance policy out on anyone?
You can't take out a life insurance policy on just anyone. To purchase a policy that covers someone other than yourself requires meeting two legal conditions. An insurance company won't approve the policy unless both conditions are met.
The first is that you must have what’s known as an insurable interest in the person. That means you possess a financial interest in the continued life of the individual. An example might be that you depend on the person to carry out work for you that would be difficult to replace – and if you did replace it, it would cost more than you pay at present, if you pay anything at all. You might also elect to insure someone on whom you depend on financially, like someone who cosigned a loan with you.
Secondly, the person in question must consent to the policy. That is, they must sign off on allowing you to secure the policy.
Who can you take life insurance out on?
Provided you satisfy the condition of having an insurable interest in your potential policyholder, and their consent, you can insure just about anyone, including your spouse, children or parents, or a business partner.
Yet – just to underline the point – you’ll be unable to insure any of those people unless they’re amenable to you doing so. A policy that’s a secret to the insured person is not an allowed option.
Getting life insurance for yourself
None of the above restrictions apply to taking out a life insurance policy on yourself. In such an instance, needless to say, you have both an insurable interest in a policy – to cover debts and other obligations you may leave behind when you die – and your own consent to insure yourself.
Determining how much life insurance to buy on yourself involves assessing the anticipated financial impact of your death, along with the needs of your dependents after you’re gone. In general, the guideline is to opt for a policy that has a death benefit big enough to cover your debts and replace the income your dependents rely upon now, and will continue to do in future.
You'll need to choose between the two main types of life insurance: term and permanent, including whole life policies. As the name implies, term life insurance offers coverage for a specific duration, such as until your kids finish college or your mortgage is paid. Permanent life insurance provides lifelong coverage and also accumulates cash value within the policy over time, against which you can borrow if you wish.
The premiums you pay will vary a lot by the type of policy you choose, along with such personal variables as your age and health status.
Getting life insurance for family members
Securing life insurance for a family member is a smart way to provide them – as well as you – with peace of mind, knowing that they’ll have a measure of financial protection if they should pass away.
As with insuring yourself, insuring a loved one requires anticipating the financial impact of their absence. As to the size of the policy, the same rule of thumb applies to them as to you. You should ensure the provided death benefit would be sufficient to settle any outstanding debts, handle funeral costs and (assuming others would depend on their earnings) replace the insured person's income for a specific time.
For example, if your partner is the primary earner and you have young kids, securing enough coverage to settle your mortgage and other debts and replace your partner's income for 10 to 15 years is a good start. You might even want to insure a kid, to help cover such (sad) costs as funerals and therapy for family members who survive the child.
Next, determine the best life insurance policy based on these circumstances. If you need coverage mostly for a set period, such as until your kids graduate from college, term life insurance could be ideal.
Permanent life insurance is a smart choice if you prefer lifelong coverage and building cash value within the policy, and are prepared to pay higher premiums than for term coverage in order to secure those things.. Options for this insurance type include whole-life coverage, which guarantees lifelong protection, and universal life insurance, which offers more flexibility than whole-life coverage.
Getting life insurance for business associates
Securing life insurance for your business associates can be a smart move, especially if they're integral to your enterprise. The potential reasons for such a policy are several.
If your would-be insured person is a key worker in the business, their death could disrupt your operations. Life insurance would help shoulder the financial burden of hiring or training their replacement. And if your business colleagues are shareholders, their death could impact your company's ownership. Life insurance could aid you in buying out their shares or keeping the business within the family.
The decision on whom to insure, and to what extent, hinges on your situation and your business's structure. Typically, such coverage is only for employees who are essential to your daily operations, shareholders who own parts of your business, business partners who co-own and run the business with you and any other crucial business partners, like key suppliers or clients.
Determining the right amount of coverage for business associates can involve considering their role in your business and the financial aftermath their passing would bring. Aim for a benefit that’s sufficient to cover the costs of disrupted operations, including spending to find someone to take over their role, and any potential loss of profits.
How to take out life insurance on someone
Now that you’ve settled that you can, and want, to insure someone other than yourself, it’s time to consider how you might do so. Here are the steps to follow.
Assess their need for life insurance
Taking out a life insurance policy shouldn’t be the first step in planning the financial implications of losing someone close to you, whether personally or in a business sense.
Rather, begin by carefully assessing, and quantifying, the various ways in which the person’s passing would affect you financially. Then evaluate any other assets you or they have that might offset those impacts.
While preparing for the unexpected is always a good idea, it's best to ensure this kind of protection is truly needed before going through the work, and expense, of taking out a policy.
Get consent from the insured
You can only take out life insurance on someone else with their knowledge and agreement. This requirement, while a potential speed bump in the process, can also be beneficial. When seeking consent, you may also be able to learn more about the would-be insuree that is helpful to the process of deciding on a policy.
That information could include details on their overall health, such as undisclosed conditions, and on any beneficiaries – other than you – that they may wish to provide for in the event of their death.
Choose the right life insurance policy
Next, you'll want to ensure you choose the appropriate policy. The main choice is for term vs. whole life insurance. To make that choice, and others such as the policy's death benefit, consider the insured's needs and circumstances. And as with any purchase of a financial product, research the various life insurance companies to establish which will insure your recipient, and with the best terms.
Submit a life insurance application
The next step is to apply for the policy. The life insurance provider will require detailed personal, health and financial information as part of the application process, so be sure the recipient of your coverage is ready and able to provide that information.
Prepare your recipient for medical exams if needed
Insurance companies often require medical examinations to evaluate the risk involved in insuring the individual. While such exams can be inconvenient for the person you're seeking to insure, they’re usually a mandatory step in the underwriting process. They help to determine if there are any underlying health conditions that may affect insurability.
Pay the insurance premium to activate the policy
Finally, once the policy is approved, you'll need to make the first premium payment to activate the policy and begin its coverage. Make sure to maintain on-time payments over the life of the policy to ensure coverage stays in effect.
Can someone take out a life insurance policy on me without my knowledge?
A third party can't take out a life insurance policy on you without your knowledge and consent. The person must first notify you of their intentions, and obtain your formal agreement to the policy. Insurance providers will not issue a life insurance policy without completion of this consent step.
Can I cancel a life insurance policy someone has on me?
Normally, you can't cancel a life insurance policy someone else has taken out on you. In the eyes of the insurance provider, the individual who originated the policy is its owner. Once you provide your consent to the coverage, that originator of the policy is the only person with the power to cancel or change it.
You may, however, have the option to request that the person transfer ownership of the policy to you. Such a situation might occur if, for example, your parents took out life insurance on you in your childhood. As an adult, you might eventually wish to assume responsibility for the policy, which would include paying the monthly premium payments. The move would also allow you to make any desired modifications to the coverage, such as changing the beneficiaries to better reflect your current circumstances.
Summary of Money's advice on taking out a life insurance policy on anyone
Generous as it may be, you can't simply take out a life insurance policy on anyone. Such coverage can only be bestowed upon someone with whom you have an "insurable interest," which is defined as having a financial interest in them continuing to live. And unless the recipient is a minor, or otherwise a dependent, they must consent to being insured.
People for whom you can typically purchase a policy, then, include immediate family members, business partners, cosigners of loans you hold, or anyone whose death would impact you in some other financial way.
The policy recipient cannot cancel the coverage, as a rule, even if they might change their mind about the coverage after first consenting to it. However, the person can likely take over the policy if they wish, and if the purchaser consents to the transfer. As the new owner of the policy, the insured person is then responsible for paying its premiums, but can make any changes they might desire, such as modifying the policy’s beneficiaries.
Want to know more about life insurance? This article on life insurance for beginners is a great place to start.