Who Can Legally Claim Life Insurance Money?

Life insurance is a valuable financial tool that provides financial protection for your loved ones after you pass away. While you may be familiar with purchasing life insurance for yourself, it is also possible to take out a policy on another person. However, there are specific criteria and legal requirements that must be met to do so. In this paragraph, we will explore the conditions under which you can legally take out a life insurance policy on someone else and the process involved in obtaining such coverage.

Who can take out a life insurance policy on someone else?

To take out a life insurance policy on someone else, you must meet two legal conditions. Firstly, you must have what is known as an "insurable interest" in the person. This means that you have a financial stake in their life and would suffer financially if they were to pass away. Secondly, the person being insured must consent to the policy.

• Spouse or life partner: One spouse can purchase a life insurance policy for the other since they rely on each other's income.
• Former spouse or life partner: If your former spouse pays child support or spousal support, you could take out a life insurance policy on them so that you would still receive compensation if they were to pass away.
• Minor child (under 18): You can take out a life insurance policy on your child to help cover health care costs and final expenses if the unthinkable happens. It can also guarantee their insurability in the future if they develop health conditions that could disqualify them from getting life insurance.
• Parent: Getting life insurance for a parent can help you pay for their end-of-life expenses and funeral costs, as well as other financial responsibilities you might inherit after their death, such as unpaid debt.
• Business partner: If you own a business with a partner, you might enter a buy-sell agreement where both partners take out a life insurance policy on the other. If one partner dies, the surviving partner uses the proceeds from the life insurance policy to purchase the deceased partner's share of the business.
• Key business employee: If you own a business, you can buy what is known as key person or key employee insurance to insure an employee who contributes significantly to the business.

In some cases, insurers may be willing to write policies based on an emotional or sentimental relationship, such as that between a grandparent and a grandchild or between siblings.

What is the process of taking out a life insurance policy on someone else?

To take out a life insurance policy on someone else, you must meet certain criteria. Here is a step-by-step guide on the process:

• Assess the need for life insurance: Before purchasing a policy, carefully evaluate the financial impact of the person's passing. Consider any existing assets that could offset these impacts and determine if there is a gap that life insurance should cover.
• Obtain consent from the insured: It is essential to have the knowledge and agreement of the person you wish to insure. Their consent may provide valuable information about their health, existing policies, and beneficiaries, which can help in deciding the size of the policy.
• Choose the right life insurance policy: Determine the most suitable type of life insurance policy, such as term or whole life insurance, based on the specific circumstances and needs.
• Submit a life insurance application: Contact the chosen life insurance provider and initiate the application process. Be prepared to provide detailed personal, health, and financial information about the insured.
• Prepare the insured for medical exams: Inform the insured about the likelihood of medical examinations, which are often required by insurance companies to evaluate the risk involved in insuring the individual.
• Pay the insurance premium: Once the policy is approved, make the initial premium payment to activate the policy and ensure its coverage. Set up a system to maintain timely premium payments to avoid policy cancellation due to non-payment.

It is important to note that you must have an "insurable interest" in the person you wish to insure, meaning you would suffer financially from their death. Additionally, the insured person must consent to the policy and be involved in the application process.

What is the insurable interest test?

The insurable interest test is a prerequisite for purchasing insurance and establishes that the policyholder has a financial stake in the insured person's life. This means that the policyholder would suffer a financial or other kind of loss if the insured person were to pass away. The insurable interest test separates the insurance business from gambling and enhances the industry's reputation.

To pass the insurable interest test, the policyholder must demonstrate that the insured person's death would have an adverse financial impact on them. This can be done by providing documentation of the relationship between the policyholder and the insured, such as proof of spousal relationship, parent-child relationship, business relationships, or other familial relationships.

The insurable interest test also requires that the insured person consent to the policy and be involved in the application process. The insured person may need to undergo a medical exam or complete a health questionnaire and submit paperwork with their signature.

In some cases, the insurable interest test may not be required for certain types of relationships, such as non-married partners or parents and children. However, it is important to note that the absence of an insurable interest test does not mean that insurance can be purchased on just anyone. The policyholder must still have a financial stake in the insured person's life and be able to prove that their loss would result in a financial or other type of hardship.

What are the different types of life insurance?

There are five main types of life insurance: term life insurance, whole life insurance, universal life insurance, variable life insurance, and final expense life insurance. Each type is designed to meet specific coverage needs.

Term life insurance is the most affordable option and provides coverage for a set number of years. It is ideal for those who only need coverage for a certain period, such as until their children finish college or their mortgage is paid off.

Whole life insurance, on the other hand, offers lifelong coverage and also accumulates cash value over time, which can be borrowed against. While it is more expensive than term life insurance, it provides straightforward and permanent coverage.

Universal life insurance is another type of permanent insurance that offers flexibility. It allows the policyholder to adjust the death benefit and premium payments within certain limits. It also has a savings component that grows based on market interest rates.

Variable life insurance is a riskier option as it is tied to investment accounts. It offers the potential for higher returns but also carries greater risk, fees, and costs.

Final expense life insurance, also known as burial or funeral insurance, is a small whole life insurance policy designed to cover end-of-life expenses such as funeral costs and outstanding debts. It is easier for older individuals or those with pre-existing health conditions to qualify for this type of insurance.

In addition to these main types, there are also other variations, such as simplified issue life insurance, which doesn't require a medical exam, and guaranteed life insurance, which asks no medical questions and cannot be turned down.

How do life insurance payouts work?

Life insurance payouts are sent to the beneficiaries listed on a policy when the insured person dies. The beneficiaries can be one or a combination of the following: spouses or partners, parents, business partners, charities, and family trusts. If no beneficiary is named on a policy, the funds often go to the estate.

The death benefit goes to primary beneficiaries first. If a primary beneficiary dies or cannot be found before the policy pays out, the death benefit may go to contingent beneficiaries. The policy owner states what percentage goes to each beneficiary, and these percentages do not need to be equal.

There are two main types of life insurance: term insurance and permanent insurance. Term insurance has lower monthly premiums and offers coverage for a certain number of years, such as 30. Permanent policies are meant to last a lifetime and include a cash value that may build over time. The policy owner can tap into that value during their lifetime.

• Lump-sum fixed amount: The beneficiary receives the entire death benefit in one payment. It is the most common selection but can be risky if the funds are not managed properly.
• Specific income payout: The beneficiary can choose to receive monthly installments over a set period to ensure the money doesn't run out too fast.
• Retained asset account: Policy proceeds can be placed in an interest-bearing account. Beneficiaries receive a checkbook to access the cash, and any interest earned is taxable.
• Annuity: Also known as a life income payout, this grants beneficiaries guaranteed payments as long as they're alive. Insurance companies use the beneficiary's age and the amount of the death benefit to determine the payment amount.

The death benefit from a life insurance policy is often tax-free. However, if the beneficiary does not receive the death benefit as a lump sum, they will likely earn interest on any money that stays with the insurer, and these interest earnings are often taxed.

Frequently asked questions