Personal Finance 101: Can You Get A Life Insurance Policy On Someone Else?
Most people buy life insurance for themselves, so they’re both the policyholder and the insured party. But many people wonder: can you take out a life insurance policy on someone else? The answer is that it’s entirely possible, although it’s a little more complicated than buying life insurance for yourself.
This guide provides you with all the information you need to know before taking out life insurance on someone else. That includes the basics of a life insurance policy, how to actually secure an insurance policy on someone, who you can purchase policies on, and specific situations when this arrangement would make the most sense.
Life Insurance Policies: The Basics
Many people buy a life insurance policy for one specific reason – to provide financial support for their families after they pass away. This section details all the basics of buying a life insurance policy to provide the groundwork for buying life insurance for someone else.
Three Relevant Parties
Buying life insurance involves three parties. These three roles may be filled either by two or three different people, depending on the setup:
- Policyholder: The policy’s owner. Directly deals with the life insurance company and pays all premiums and fees.
- Beneficiary: The person/persons/entities that receive the death benefit when the insured person passes away.
- Insured person: The individual whose death would prompt the insurance company to pay out the death benefit.
How It Works
A policyholder usually applies for a plan with a life insurance company that promises a death benefit, or a specific amount to be paid out after their passing. To qualify for this death benefit, the policyholder has to keep up with their monthly or yearly payments called premiums. Premium payments, or your life insurance rates, are calculated based on the results of a medical exam combined with the insured person’s age, sex, overall health, and family history of disease and illness.
Common Types Of Life Insurance
Life insurance companies usually offer a wide range of health insurance policies to suit every person’s needs. Regardless, most people will end up purchasing one of two common types of life insurance: term life insurance and whole life insurance.
- Term life insurance: Covers 10, 20, or 30-year periods and is generally cheaper than whole life insurance. If the plan expires before you pass away, you and your loved ones don’t receive a payout.
- Whole life insurance: Covers the insured person’s entire life, but costs more than term life insurance. Some variations of whole life insurance allow for life insurance coverage and death benefit adjustment.
How To Take Out Life Insurance On Someone Else
When planning to buy life insurance for someone else, there are three key things you have to keep in mind. These are consent, insurable interest, and actually going through the application process with an insurance company.
Get Consent
Before contacting a life insurance agent and their respective companies, we recommend contacting the person you’ll be purchasing a policy on. More than simple courtesy, securing their consent will make the process of buying life insurance easier. On top of this, insurance companies cannot legally allow you to purchase a life insurance policy for someone without their knowledge.
Establish Insurable Interest
Before you can get life insurance on someone else, you need to establish insurable interest with your insurance company. For simplicity’s sake, insurable interest can be used interchangeably with “financial interest”. That means you would need to prove the insured person’s death would result in a demonstrable financial burden for you.
Insurable interest exists to protect companies against insurance fraud, which usually refers to when a claimant tries to obtain some benefit or advantage they are not entitled to. Given this, your spouse, partner, and parents don’t usually have to prove the existence of insurable interest. However, a business partner, friend, or other non-familial relationships usually require insurable interest to be established before they can buy a policy for someone else.
Go Through The Application Process
After you’ve gained consent and established insurable interest, you’ll finally be able to begin the application process to purchase life insurance for your desired person. The paperwork generally requires both you and the insured person’s signatures, a medical exam, and filling out some basic information to give your insurer a good idea of the possible life insurance rates.
Who Can I Purchase Life Insurance For?
Given that you can provide pertinent information and establish insurable interest, you can buy life policies on almost anyone. However, there are a few common situations where buying a life insurance policy makes more sense than others. One thing to note is that every company has different rules regarding their life insurance policies.
Your Sibling
Establishing insurable interest doesn’t matter quite as much when you’re looking to buy a life insurance policy on a family member – and siblings are no exception. This option can benefit siblings that share a home, own a business together, or support each other financially. The payouts can be used to cover credit cards, student loans, or other types of financial obligations.
Your Partner Or Spouse
One of the main reasons someone might buy life insurance for another person is to secure themselves if their partner or spouse passes away. This process is much easier than getting insurance for other people in your family because you and your spouse or partner naturally have obligations to each other. Therefore, companies won’t require you to establish insurable interests before you can get a life plan.
Your Parents
Another typical setup when buying a policy on other individuals is when older offspring purchase plans on their parents. As the plan’s beneficiary, they can use the proceeds to pay for their parent’s funeral expenses, medical bills, or legal fees. This can be done in tandem with an inheritance or as a standalone policy.
One of the things to consider when getting a policy on your parents is that it’s much easier to establish insurable interest with you as the beneficiary versus the other way around. However, if you support your elderly parents financially, then insurance companies will likely allow them to take policies out on you.
Your Business Partners
If you own a business with a partner, you may be eligible for key person insurance. This is when you would name yourself as the beneficiary so that all payouts can go toward keeping the business running. Both business partners may take this policy out on each other.
A Former Spouse
Some folks may want to get a policy on a former spouse or partner because of shared assets or dependents. If your children still depend on your ex’s income, then life insurance would serve as continued child support after they pass away. The death benefit payout can even be used for your child’s education so they won’t be saddled with student loans. In some cases, the payout can even be used to cover joint credit cards.
Ex-spouses may even be ordered to get an insurance policy by a judge. This order can come alongside alimony payments or other financial obligations.
Your Adult Offspring
Unlike buying an insurance policy for your spouse or young child, you’ll need all the pertinent documents and information to establish insurable interest when applying for a plan on an adult child. Getting an insurance policy on your adult offspring may be viable if you have co-signed loans on their behalf or have other financial obligations that involve both you and your offspring.
Alternatively, grown-up children may want to consider buying policies on their parents for extra financial security after they pass away.
Your Young Child
While unconventional, some users may want to take out a life insurance policy on their young child or another family member. There are a few reasons why this can be a good idea:
- Because the person you’re trying to insure is so young, companies won’t conduct physical exams and generally will give you the lowest possible premiums.
- Some plans can “double-up” in value over time, which results in greater coverage for cheaper premiums.
- Permanent policies can build more cash value.
However, do note that establishing insurable interests can be quite difficult because young children don’t usually provide financial support to their families.
Given this, purchasing a child rider on an existing life policy may be a sound alternative to taking out an entire life insurance policy on a minor or young family member. Having this rider may also secure the child’s future insurability because it grants them the ability to purchase more policies down the road.
Reasons To Take Out A Life Insurance Policy On Someone Else
Beyond wanting financial security for you and your loved ones, there are some very good reasons to purchase a policy that insures someone else and names you as the beneficiary. This option can be viable if you’re owed alimony if you want more control over your policy, or simply for peace of mind.
You’re Owed Alimony Or Child Support
Things can get messy when a marriage ends, and sometimes it can end in a court-ordered policy and alimony payments. However, if your ex-spouse owns the policy, they also reserve the right to name someone else as the plan’s beneficiary. However, taking out a life plan on them would make you the policy owner, and therefore can be an excellent way to protect your payout.
For Peace Of Mind
Even with all the information in the world, the future can be uncertain. The number one reason people buy life plans is for their peace of mind. Taking out a policy on another person can be a viable method of securing your finances when they pass away. This is incredibly valuable if you rely on them for support.
For More Control Over The Policy
Sometimes managing a life policy for someone else is the best way to ensure that everything is going to plan. For this to happen, you’ll need complete control over premium payments and the ability to make adjustments on the fly. Whether you’re managing a policy on an ex-spouse or you simply want to make sure a plan is always kept up-to-date and in force – owning a life plan on someone else guarantees an arrangement that suits you best.
Frequently Asked Questions
How much life insurance coverage can I get for another person?
After establishing insurable interest, policyholders have to ask themselves how much interest they have in the individual they’re looking to take a policy out on. The amount of coverage differs on a case-to-case basis, depending on what you’ll need the insurance for.
For example, if you’re taking a policy out on your mother because you have to cover her funeral expenses, then the plan’s coverage has to match its projected cost. Therefore, $300,000 coverage on $10,000 funeral services won’t make any sense to your insurer.
A good rule of thumb when negotiating for coverage is asking yourself two questions:
- Is this a reasonable amount?
- Is this enough to cover the financial impact that losing this person would have?
Can I transfer my policy to someone else?
Yes! Policies can even be transferred to someone that does not have an insurable interest in your insured person. To do so, policyholders will need to contact their insurers and complete a change-of-ownership form. However, if the original policyholder passes away within three years of the transfer, insurers will often ignore the transfer.
Do note that taxes may apply on a per-policy basis, and it’s best to consult with a financial professional if you feel your policy will be subject to tax.
What are the alternatives?
The insured individual can buy the policy on themselves and transfer ownership to you with a “Deed of Assignment”. That means you’ll be the legal owner and beneficiary and receive the death benefit when the insured person passes away. Note that the Deed of Assignment is a legal document that a lawyer or financial adviser may need to look over before submission.
Alternatively, the policy can be put into a trust. If you’re named a trustee, then the money would be provided to you and other named beneficiaries when the policy pays out.
Conclusion
Buying a life plan for someone else is an excellent way to secure yourself if a parent, business partner, or another member of your family passes away. However, every plan taken out on another individual’s life requires establishing insurable interest, which may be more complicated for some types of relationships.
That’s where a financial adviser can make the process easier. Contact us at Wesley Insurance, LLC to find out how we can help you!