People are most familiar with taking out a life insurance policy on themselves to financially provide for their family should anything happen. The benefit from your plan can go towards paying for final costs, covering education fees for your kids, or helping your surviving spouse stay financially stable. But is it possible to purchase life insurance on someone else?
The short answer is yes, you can buy life insurance on another person. The long answer is that even though it is possible there are certain criteria that must be met. Today, we’re taking a look at what you need to know about getting insurance for someone else.
The Importance of Insurable Interest
Life insurance serves the purpose of financially protecting your loved ones in the event you lose your life. The benefit your plan pays out to your chosen beneficiaries in order to help them carry on and protect their financial future without you. But if you want to purchase life insurance on another person, you must have insurable interest.
Insurable interest means that you would be financially hurt in the event the insured person dies. Simply put, you can’t just take out insurance on any random person you choose, it has to be someone who’s passing could hurt you financially.
For example, you can’t take out a policy on your unrelated elderly neighbour. The passing of a friendly neighbour will not have much of a negative financial impact than the passing of a close family member.
Consent is always required when taking out a life insurance policy on someone else. Getting permission is key to preventing the fraudulent act of policies being taken out without the insured knowing. But getting the potentially insured person’s permission is only the first step to beginning the process.
Insurance companies will often require the person you are looking to get insured to undergo a medical exam and take a detailed health questionnaire. If a plan doesn’t require medical exams or questionnaires the signature of the insured will often be required when issuing an insurance policy.
The one and only situation where consent and insurable interest are not required are when parents are taking out a life insurance policy on their minor children.
Who Can You Buy a Policy On?
The most common people individuals take out policies on is their spouse or partner. Both people in this instance can get a policy for themselves and make the other their beneficiary, but there is also obvious insurable interest in this situation. Either making each other a beneficiary or simply taking out a policy on each other are two equally effective ways of protecting your financial futures.
Elderly parents are another common group of people to take out a policy on. The adult children of these parents often do this in order to help cover eventual final expenses and settle any debts their parent may have had. Also, if these elderly parents often watch over their grandchildren a policy taken out on them could help cover the costs of daily child care.
Finally, business partners are another typical group of people that you may want to buy insurance for because of how valuable they may be to your company. Usually, people who decide to take out a policy on a business partner will have it equal their respective share of the company. Doing this will allow the surviving partner to buy out any heirs and keep the company moving forward under his or her control.
Key man insurance is a form of life insurance that businesses take out on an important employee, like a CEO, so if he or she passes away the benefit will help the company locate a suitable replacement. The benefit will give the company time to adjust to the loss of the person and make the next best move to help recover from any financial setbacks.
Can Policies be Taken Out Without the Insured Knowing?
This is most likely something people would see on a daytime murder mystery show, but the reality is it’s next to impossible for this situation to occur. Consent and insurable interest make it incredibly difficult for an individual to take a policy out on someone without them knowing. Also, the required medical exams that most plans and insurers put in place in this instance adds another level of security to fighting insurance fraud.