Who Can Get Life Insurance On Your Behalf?

Life insurance is meant to provide financial support to your loved ones in the event of your death. While you can purchase a policy for yourself, you may also be able to buy a plan for someone else. However, this depends on whether you have an insurable interest in the person and if they consent to the policy. Insurable interest means that you would suffer a financial loss if the insured person passes away. Typically, this applies to family members and business partners, but it can also include other relationships where financial dependency or support is involved. Obtaining consent from the insured person is crucial, and they must be involved in the application process, including agreeing to a medical exam and answering questions. Without their knowledge and consent, a third party cannot take out a life insurance policy on you.

Who can take out life insurance on someone else?

Taking out life insurance on someone else is possible, but there are certain conditions that must be met. The first is that you must have what is known as an "insurable interest" in the person. This means that you would face financial hardship or loss if they were to pass away. It needs to be demonstrated that the insured person's death would have an adverse financial impact on you.

The second condition is that the person being insured must give their consent. They must be willing to cooperate throughout the application process, including agreeing to a medical exam and answering application questions.

Spouse or life partner

Spouses and life partners often depend on each other financially and emotionally, so it is common for them to take out life insurance policies on each other. This is considered a smart move, as it can help replace lost income and cover expenses like childcare or running a household.

Former spouse or life partner

Even after a union is gone, former spouses may still have an insurable interest in each other, especially if there is shared custody of children or ongoing financial obligations.

Parent

An adult child can take out life insurance on their parent if they can demonstrate that they would suffer a financial loss due to final expenses, debt settlements, or other costs associated with their parent's death. Purchasing a policy for a parent can also help ensure an inheritance for future generations or cover expenses such as long-term care or estate taxes.

Child

While most families do not depend on their children for financial support, some parents take out life insurance policies on their children as part of a broader financial plan to pass wealth to their dependents. Life insurance for children can also help guarantee their insurability in the future, especially if they have a known health issue or are at risk of developing one.

Sibling

It is less common to take out life insurance on a sibling, but there are cases where it makes sense. For example, if your sibling is supporting your parents or has health issues that may result in unpaid expenses, a life insurance policy can help protect you from financial burden if they pass away.

Business partner or key employee

Business partners often have life insurance policies on each other, as the loss of a partner could put the business in jeopardy. Life insurance can help sustain the business by providing funds to support a buyout or cover critical costs. Key employees who are vital to the business can also be insured to protect against financial losses from their death.

Co-signer of loans

If you co-sign a loan with someone, you have an insurable interest in them because you would be responsible for repaying the debt if they were to pass away.

What is insurable interest?

Insurable interest is a type of investment that protects against financial loss. It is a key principle of insurance, and applies to all insurance policies. It means that a person or entity has a financial stake in an item, event, or person, such that damage or loss would cause them financial loss or hardship.

In the context of life insurance, insurable interest means that the policyholder would experience financial loss and hardship if the insured person died. The policyholder must be able to prove this interest and gain the consent of the insured person before a policy can be issued.

The principle of insurable interest ensures that the policyholder is not incentivised to cause loss or damage in order to profit from the insurance payout. It also safeguards the insurer from unnecessary contracts and obligations.

Insurable interest can be applied to people or entities where there is a reasonable assumption of longevity or sustainability, without the occurrence of unforeseen adverse events. For example, a business may have an insurable interest in its CEO, or a football team in its star quarterback.

In the case of life insurance, the following people may be considered to have an insurable interest in the insured person:

• Spouse or former spouse
• Children or grandchildren
• Special needs adult child
• Employer (under certain arrangements)
• Parents
• Business partners
• Siblings

Do you need consent from the person being insured?

Yes, you need consent from the person being insured. The insured person must be involved in the application process and will have to go through the underwriting process, which involves answering questions and, in most cases, taking a life insurance medical exam. The insured will also have to sign the application. The insured person's only role in the policy is to go through underwriting, and they must be present for every step of the application process. The exception to this rule is if you're buying life insurance for a child.

What are the ethical considerations?

Ethical considerations are paramount when it comes to taking out a life insurance policy on someone else. Here are some key points to consider:

Insurable Interest

It is essential to ensure that you have a genuine financial interest in the person you are insuring. Without a valid insurable interest, there could be moral hazards and conflicts of interest. The concept of insurable interest means that you would face financial hardship or loss if the insured person died. This could include situations where you depend on the person financially or where their death would result in increased financial responsibilities for you.

Informed Consent

Respecting the autonomy and privacy of the individual is crucial. Obtain their informed consent before proceeding with any insurance arrangement. This means the insured person must be aware of and agree to the policy, and their participation is required throughout the application process. This includes consenting to medical examinations and providing honest answers to application questions. Informed consent is essential for maintaining trust and transparency in the insurance process.

Relationships and Trust

The impact on relationships and trust is another important consideration. Taking out a policy without the knowledge or against the wishes of the insured person can irreparably damage relationships. Open and honest communication is key. It is essential to consider how the insurance arrangement may affect your relationship with the insured person and ensure that it aligns with ethical principles.

Values Alignment

Reflect on whether the insurance arrangement aligns with your personal values and ethical standards. Taking out insurance solely for financial gain, without considering the well-being of the insured, raises significant ethical concerns. Ensure that your decision is approached with empathy, integrity, and a sense of ethical responsibility, considering the broader implications beyond financial gain.

Common Risks and Pitfalls

There are several risks and pitfalls to navigate when taking out a life insurance policy on someone else. Firstly, lack of consent is a legal issue, and policies taken out without the insured's knowledge and explicit consent may be invalid. Additionally, ensuring a valid insurable interest is crucial, as policies may be deemed void without it. Affordability of premiums over the long term is another factor to consider, as defaulting on payments can lead to policy lapses and loss of coverage. Accurate disclosure of the insured's health information is also essential to avoid denied claims during the underwriting process. Finally, reading the fine print and understanding the policy specifics are critical to avoiding surprises during critical times.

How do you take out life insurance on someone?

To take out a life insurance policy on someone, you must have a financial stake in their life and their consent. This means that the person being insured must be aware of and agree to the decision. Additionally, you need to prove that their death would result in financial loss and hardship for you, which is known as having an "insurable interest". The specific steps to take out a life insurance policy on someone else are as follows:

• Assess their need for life insurance by evaluating the financial impact of their absence and any assets that could offset those impacts.
• Get consent from the insured individual, as their knowledge and agreement are required.
• Choose the right life insurance policy by deciding between term and whole life insurance based on the specific circumstances.
• Submit a life insurance application and provide detailed personal, health, and financial information.
• Prepare the insured individual for any required medical exams to evaluate the risk involved in insuring them.
• Pay the insurance premium to activate the policy and ensure timely payments to maintain coverage.

It is important to note that you cannot take out a life insurance policy on just anyone. The relationship must pass the "insurable interest" test, and common examples include insuring a spouse, business partner, parent, or child. When taking out a life insurance policy on someone else, it is crucial to carefully consider the financial implications and obtain their consent throughout the process.

Frequently asked questions