How To Secure Life Insurance For A Friend

Life insurance is meant to provide financial support for someone who may need it after your passing, and because of this, you can't purchase a policy on just anyone. To take out a life insurance policy on someone else, you must have a financial stake in their life and get their permission. This is called having an insurable interest in that person. In other words, you must prove that you rely on them financially and would suffer a loss if they died. The person being insured must also be present for every step of the application process and may need to undergo a medical exam.

Getting consent from the insured

• The insured person must be aware and provide consent: It is essential to have an open and honest conversation with the person you wish to insure. Explain your reasons for wanting to take out a life insurance policy on them and obtain their verbal or written consent. This ensures they are comfortable with the plan and understand its implications.
• Involve the insured in the application process: The insured person must be present and actively involved in the application process. They will need to provide personal information, such as contact details, age, medical history, and may be required to undergo a medical examination.
• Understand the insured's responsibilities: Ensure that the insured person understands their role and responsibilities in the underwriting process. This includes providing accurate information, participating in interviews, and completing any necessary forms or examinations.
• Obtain necessary signatures: The insured person will need to sign the life insurance application to give their consent and allow the insurance company to collect their data, including medical history.
• Consider an irrevocable beneficiary assignment: In some cases, you may want to consider an irrevocable beneficiary assignment, which means the beneficiary cannot be changed. This can provide added comfort to the insured person, knowing that the beneficiary is fixed. However, policyholders should use caution as this assignment cannot be altered.
• Regular communication: It is important to maintain open communication with the insured person throughout the process. Discuss any concerns or questions they may have and ensure they feel involved in the decision-making.
• Seek professional guidance: If you are unsure how to approach the conversation or need help articulating your reasons, consider involving a financial advisor or life insurance agent. They can provide documentation supporting your insurable interest and help facilitate the discussion.

Remember, obtaining consent from the insured is not only a legal requirement but also an ethical one. It is crucial to respect the insured person's wishes and ensure they are comfortable with the life insurance policy you wish to take out on them.

Proving insurable interest

• Spouse: People generally have an insurable interest in their spouse. A marriage certificate or domestic partnership registration can be used to prove this relationship.
• Dependent relationship: Dependents always have an insurable interest in the person whose income they rely on. A dependent's birth certificate or documentation of legal guardianship can be used to prove a dependent relationship.
• Parents: You can get life insurance for your parents with their consent to cover end-of-life costs and funeral expenses when they pass away.
• Business partners: The death of a business partner can impact a business, giving each partner an insurable interest in the others. A business license, partnership agreement, or shareholder agreement can serve as documentation of this relationship.
• Corporations: Corporations may obtain life insurance on high-level employees, such as senior executives, as their death could significantly impact the company. Corporations can prove this with an employment contract, financial statements highlighting the employee's financial importance, meeting minutes, and more.
• Estate planning: Your estate plan's beneficiaries have an insurable interest in you. Trust agreements and wills can provide proof of this relationship if they name the beneficiaries.
• Legal obligations: If someone owes you legal obligations, such as alimony or child support, you may have an insurable interest in that party. Documents like court orders can prove this relationship.
• Debtor-creditor relationship: If you loan someone money, you have an insurable interest in them as you may not recover your loan if they pass away. A loan agreement can prove this relationship.

It's important to note that insurable interest doesn't always have to be economical. Sentimental interest based on love and affection may be sufficient in some cases, especially for relationships by blood or marriage. However, if there is no financial dependency or sentimental interest, you cannot purchase life insurance for just anyone, such as a casual friend, acquaintance, or stranger.

Choosing a policy type

When choosing a life insurance policy, it's important to consider your unique circumstances, financial goals, and budget. Here are the key policy types to choose from:

Term Life Insurance

Term life insurance provides coverage for a specified period, such as 10, 20, or 30 years. It is generally more affordable than permanent life insurance and is ideal for those who want coverage for a specific debt or situation, like covering the years of a mortgage. However, if you still need coverage after the term expires, renewal rates can be unaffordable.

Whole Life Insurance

Whole life insurance offers lifelong coverage and includes a savings component that builds cash value over time. It is one of the more expensive options due to its guaranteed features, such as fixed premiums and death benefits. This type of policy is suited for those seeking lifelong coverage and willing to pay for the guarantees provided.

Universal Life Insurance

Universal life insurance is another form of permanent coverage that offers flexibility. It allows adjustments to the death benefit and premium payments within certain limits. The interest rate for the cash value component is not fixed and can change based on market conditions. This type of policy can be good for those seeking lifelong coverage and interested in flexible premium payments.

Variable Life Insurance

Variable life insurance is a riskier form of permanent coverage. It consists of a fixed death benefit and a variable cash value component tied to investment options. While it offers a wider range of investment options, it also exposes you to higher risk, fees, and costs. This type of policy could be beneficial for savvy investors but may not be suitable for those averse to risk.

Final Expense/Burial Insurance

Final expense insurance, also known as burial or funeral insurance, is a type of whole life insurance with a smaller and more affordable death benefit. It is designed to cover end-of-life expenses and is often easier for older or less healthy individuals to qualify for. This type of policy is generally for those in poor health who don't have other life insurance options.

Supplemental Life Insurance

Supplemental life insurance provides additional coverage beyond what a company's group life policy offers. It is typically offered through your employer or a private insurance company for an additional premium. It serves as a good supplementary coverage to your individual life insurance policy.

Survivorship Life Insurance

Survivorship life insurance, also known as joint life insurance, covers two people under a single policy. The payout is made to beneficiaries after both insured individuals have passed away. This type of policy is beneficial for estate planning and can provide funds for heirs or charitable donations. However, it is not suitable if one spouse would suffer financially from the other's death.

Mortgage Life Insurance

Mortgage life insurance is designed to cover only the balance of a mortgage. The death benefit is paid to the mortgage lender, not a chosen beneficiary. This type of policy is intended for those concerned about their family being burdened by the mortgage in the event of their death. However, it does not provide financial flexibility as the payout is restricted to the mortgage lender.

Credit Life Insurance

Credit life insurance covers a specific debt, typically offered when taking out a loan. The payout goes to the lender, not your family. While it may seem appealing for covering a certain debt, it lacks financial flexibility. Term life insurance is generally a better option as it can be used for multiple purposes, including debt coverage.

Proving your relationship

To take out a life insurance policy on someone, you must have their consent and prove that you have an "insurable interest" in them. Insurable interest means that the insured person's death would cause you financial hardship or loss. This can include family members, business partners, or even former spouses.

• Spousal relationship: Spouses and life partners typically share financial obligations, making it relatively easy to prove insurable interest. This includes financial support, shared custody of children, and alimony obligations in the event of divorce.
• Parent-child relationship: If you rely on your adult child for financial support or caregiving, or if your child relies on you for these things, there is an insurable interest. This can also apply to other familial relationships, such as siblings, grandparents, aunts, uncles, or cousins, especially if there is a caregiving or financial support dynamic.
• Business relationships: If the insured person is an essential employee, business partner, or key executive in a company, their death could result in financial loss for the business. This includes situations where a business owner wants to insure a founder, owner, or executive, or when a bank insures a borrower to cover the risk of losing loan money in the event of their death.
• Creditor-debtor relationships: Although less common, a lender may be able to prove insurable interest in a borrower if the debt is significant and the borrower's death would impact repayment.
• Non-married partners: For unmarried couples, proving insurable interest may involve demonstrating financial dependency. This can include providing proof of joint responsibility for basic financial obligations, such as a joint lease or mortgage, shared debts, or having children together.

Remember, you must obtain consent from the person you wish to insure, and they will likely need to undergo a medical exam and phone interview as part of the insurance application process.

Determining the insurable need

To determine insurable interest, you must prove that you have a financial stake in the insured person's continued well-being and would experience financial hardship if they were to pass away. This is called having an "insurable interest" in that person. While that would seem to limit life insurance to direct relations, there can be circumstances where the application can be a little more broad.

Insurable interest can be proven in two ways:

• Economic insurable interest: This is when you can demonstrate that you would face a serious financial loss if the insured person dies. For example, if you are financially dependent on them or would otherwise experience significant financial hardship without their income. This type of insurable interest is common between spouses, parents, and children, as well as business partners.
• Sentimental insurable interest: This is when the insurable interest is based on love and affection rather than a financial relationship. This type of insurable interest is typically recognized between spouses, parents, and children, and grandparents and grandchildren.

It's important to note that you cannot purchase a life insurance policy for a casual friend, acquaintance, or someone you don't know. Your relationship would not pass the insurable interest test, as you would not directly experience financial difficulty if they died. Additionally, you cannot purchase a policy without the insured person's knowledge and consent.

Frequently asked questions