Can You Buy a Life Insurance Policy for Someone Else?
Typically, an individual buys a life insurance policy to insure themselves.
This way, they make sure their family members can survive financially after they pass away.
But is it possible for you to purchase a life insurance policy that pays out if someone else dies?
Essentially, can you buy life insurance for someone else?
It depends on the specifics of the situation, but there are definitely situations where you can buy a life insurance policy for another person.
Here’s what you need to know.
You Can Buy Life Insurance for Someone Else in Certain Cases
In general, it is possible to buy life insurance for someone else.
There is a crucial test you must pass before you can, though.
It’s called having an insurable interest. Thankfully, it’s a fairly easy concept to understand.
Having an insurable interest is key
When purchasing life insurance on someone else, having an insurable interest in the person is the main test you’ll have to pass.
This basically means you’d have some financial or emotional impact from the person dying.
The most common life insurance scenario clearly has an insurable interest.
A person may get life insurance on themselves to provide for their spouse.
If you die, your spouse loses access to the income you earned. Your spouse will likely have a period of emotional grief after you die, too.
These events show a clear insurable interest.
Things get more complex as the relationship diminishes, though.
A parent has an insurable interest in a child, but not to the same degree. The child does not likely provide income for the parents, but they would have an emotional impact.
Financially, an insurable interest exists because the parents would have to pay for the final expenses after their child passes away.
In a rare instance, for example, a child may be a highly paid TV actor. Parents my depend on this income and the insurable financial interest would be even more substantial.
But are there other cases where insurable interest exists? Definitely.
Rely on the insured person for income or support
As you can tell, the primary way you show insurable interest in most cases is by proving you relied on the insured for income or support.
This should be easy if it’s true.
Anyone you receive regular income from should show an insurable interest as long as the income is significant enough.
- Insurable interest: An ex-spouse sends $1,200 per month to you in alimony
- Not insurable interest: An aunt that sends you a birthday card with $20 in it once per year
Support could also count for showing an insurable interest.
You may be an elderly individual with a medical condition that requires you to rely on a child for your daily care.
If that child passes away, you’d have to pay for a nursing home or a home health aide.
This represents an insurable interest in the child.
Another scenario could simply be an ex-spouse who cares for your child during the week. If the ex-spouse passes away and you work a 9-5 job, you’d have to provide care for the children during working hours.
This could add a significant cost and represent an insurable interest.
Here are a few other common ways you could have an insurable interest:
- You're in business together
- Cosigned loans
- Negative financial impact
You’re in business together
While some businesses are owned by a single person, many are co-owned by business partners.
Generally, partners work on different aspects of the business. Combined, they are a formidable team that helps the business grow.
A business can suffer significantly if a business partner passes away unexpectedly.
The living partner will need to find and hire a replacement if the business survives.
For this reason, taking out a life insurance policy on a business partner has an insurable interest worth considering.
Cosigned a loan
When your kids are first getting started out on their own, they usually don’t have much, if any, credit history.
It's very common for people to have cosigned auto loans, student loans, and mortgages.
If the person you cosigned the loan for dies, you may be responsible for paying it off.
You have a definite insurable interest in this case and can obtain a life insurance policy insuring that person.
Your finances would worsen if they die
Another reason to have an insurable interest is if your finances will worsen if that person dies.
Let’s say you have a grandchild that provides financial support to you. They send you $1,000 per month to help with the bills.
This would prove an insurable interest and allow you to take out a life insurance policy on them.
If a person dying would be financially burdening, you have an insurable interest, as well.
Let’s say you have a grown 40 year old child that has no spouse or children.
You’d ultimately be responsible for paying their funeral expenses if they die. In this case, you have an insurable interest.
How Buying Life Insurance for Someone Else Works
Buying life insurance on someone else isn’t the same as buying life insurance on yourself.
While the application process is pretty similar, there are some considerations you’ll have to take into account.
When you insure someone else, that person needs to be cooperative and agree with the process.
Filling out an application is easy when you’re doing it for yourself because you know all of the answers to the questions or where to look to find them.
When filling out an application to insure someone else, they need to answer the questions on the application for you.
The person getting insured will also require a medical exam for most policies.
No-medical-exam options may be available but they often have higher premiums.
The person getting insured must sign the application and the policy to verify everything is accurate and that they agree to be insured.
Finally, the person taking out the policy pays the premiums to activate coverage once everything else is complete.
Does It Make Sense To Buy Life Insurance on Someone Else?
Usually, it only makes sense to buy life insurance on someone else if you’ll suffer financially if they pass away.
Paying the final expenses for a loved one that may not otherwise have a funeral could be important to you.
Similarly, having income after an ex-spouse that pays you alimony or child support dies is a legitimate reason to buy life insurance on that ex-spouse.
Buying life insurance just to hope to get a big payout when someone dies isn’t likely a good idea. The person could outlive the length of a term life policy. In this case, you’d receive nothing for the premiums paid.
There’s also a real risk you could die before the insured person does. In this case, the policy could expire if the policy cannot be transferred or no one else takes over the premium payments.
Consult an Expert
Don't assume that you have insurable interest in another party--confirm with an expert.
A life insurance agent that works for a life insurance company can let you know whether you have an insurable interest or not.
That said, you may not want to rely on these agents to help you decide what type of life insurance to buy. They receive commissions that vary based on the product they sell you. The more profitable products for life insurance companies tend to pay higher commissions despite not necessarily being the best fit for you.
To help you get objective advice about what type of policy is best for your situation, consider consulting a fee-only fiduciary financial advisor.
These advisors get paid directly by you. They do not accept commissions.
This means their advice is guaranteed to be in your best interests.
While their advice costs money, it may be worth the peace of mind to know you’re getting objective advice.