Can You Take Out a Life Insurance Policy on Anyone?
Life insurance isn't only a worthwhile buy for yourself. You might also want to consider taking out a policy on the life of another person – a family member, perhaps, or a business partner whose death would deal a financial setback to you or your family.
Not every life insurance purchase that isn't in your own name is allowed. Your ability to insure someone else hinges on whether you have a financial stake in that person's life, 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 of buying a life insurance policy that isn't in your own name.
Can you take a life insurance policy out on anyone?
Purchasing a life insurance policy that covers another person requires meeting two legal conditions. An insurance company won't approve the policy unless both are met.
The first is that you must have what’s known as an "insurable interest" in the person. That means you have a financial stake in whether the individual continues to live. An example is that you depend on the person to carry out work for you, and that labor would be difficult to replace – and if you did replace it, it would cost more than you pay at present, assuming you even pay anything at all. You might also elect to insure someone on whom you depend financially, like the person 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 buy the policy for them.
Tips on insuring different types of people in your life
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 allowed.
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 – permanent policies cost far more than term ones, for example – along with such personal variables as your age and health status.
Taking out life insurance on a family member
Securing life insurance for a family member is a smart way to provide them – as well as you – with peace of mind, knowing that their financial obligations will be taken care of after they pass away.
As when you're insuring yourself, the size of the policy that's needed for a loved one for requires anticipating the financial impact of their absence. Plan on a death benefit that would be sufficient to settle any outstanding debts, handle funeral costs and (assuming other people would depend on their future earnings) replace the insured person's income for a specific time.
For example, if your partner is the primary earner in your household and you have young children, a good start would be to secure enough coverage to settle your mortgage and other debts and replace your partner's income for 10 to 15 years. You might even want to insure a child, to help cover such (sad) costs as funerals and therapy for family members who survive the loss of the young one.
Buying life insurance for a business associate
Securing life insurance for a work colleague can be a smart move, especially if they're integral to your enterprise. The death of a key worker on whom you depend heavily could seriously disrupt your operations. Life insurance would offset the financial burden of hiring or training their replacement. And if your business colleague is a shareholder, their death could impact the ownership of your company. A benefit from a policy could aid you, as the policy's beneficiary, in buying out their shares or in keeping the business within the family.
The decision about whom in your business to insure, and for how much, hinges on your business and its structure. Typically, such coverage is only taken out on employees who are essential to 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.
Deciding on the right amount of coverage for such associates involves considering their role in your business and the likely financial aftermath of their passing. Aim for a benefit that’s sufficient to cover the costs of disrupted operations, including what you'd need to spend 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 on insuring a person 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
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. Buying life insurance on someone else shouldn’t be the first step in planning the financial implications of losing them.
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. A life insurance purchase can then be considered to close any gap.
Get consent from the insured
You can only take out life insurance on someone else with their knowledge and agreement. While this requirement complicates the purchase, it can also be beneficial. The process of obtaining consent may turn up information about the insured person that is helpful to the process of deciding the size of policy you need, or even if one is a good investment at all.
That information could include details on any existing policies they hold, along with their overall health, including 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, determine the best life insurance policy based on these circumstances. The main choice is between term and whole life insurance. A term policy may be the best choice if the obligations you want covered after the death of the insured will end at a certain point – as with, say, a mortgage that will be paid off or college costs that will end upon graduation.
Permanent life insurance is an option if you want to combine coverage for the life of the person with an investment component that beneficiaries could receive after the person dies. 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.
Naturally, you should 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. As part of the application process, the life insurance provider will require detailed personal, health and financial information, so be sure the recipient of your coverage is ready and able to provide that data
Prepare your recipient for medical exams if needed
The person you're insuring may not be aware that insurance companies often require medical examinations to evaluate the risk involved in insuring the individual. While such exams can be an inconvenience, they’re usually a mandatory step in the underwriting process, at least in order to receive a large death benefit. The evaluations 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. You should also set up a system for maintaining on-time payments of the premiums, since any lapses could risk the cancellation of the policy due to non-payment.
Can someone take out life insurance 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 life insurance someone has bought on me?
Normally, you can't cancel a life insurance policy on you that you have not purchased; as a rule, only the policy's originator can cancel or change coverage.
You may, however, have the option to request that the person transfer ownership of the policy to you, provided the purchaser consents. 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
You can't simply take out a life insurance policy on anyone, generous as it may be to do so. Such coverage can only be bestowed upon someone with whom you have an "insurable interest," which is defined as having a financial stake 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 is agreeable 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.