Life Insurance: Insuring Non-Relatives, Is It Possible?

You can take out a life insurance policy on someone who is not a relative, but you must be able to prove that you have an insurable interest in that person and get their consent. Insurable interest means that you would suffer financial loss or hardship if they were to die. For example, you might depend on that person financially, or they may be a caregiver for your children or ageing parents.

In addition, the person being insured must consent to the policy and be involved in the application process, including answering questions and, in most cases, taking a medical exam.

Spouses and partners

Insurable interest goes both ways in the case of spouses and partners. If one spouse or partner is a stay-at-home parent or caregiver, their contributions to the household are also considered when taking out a life insurance policy. This includes caregiving, housework, cooking, errands, and other chores. The loss of these contributions can be a significant financial burden, and life insurance can help mitigate this.

Additionally, divorce decrees often involve life insurance to cover alimony obligations in the event that one of the spouses passes away. In such cases, the insurable interest can continue even after the union has ended.

It is important to note that both insurable interest and consent from the insured party are required to take out a life insurance policy. The insured party must be involved in the application process, undergo the underwriting process, and sign the application and policy.

Business partners

In the case of a buy-sell agreement, each partner buys a life insurance policy on the other and receives a death benefit payout if the partner dies. This payout is then used to buy the deceased partner's share of the business from their surviving spouse, children, or other family members. This creates stability for the company, allowing it to continue functioning with limited financial impact.

Children

Parents, grandparents, or legal guardians can buy life insurance for their children. This is known as children's life insurance and can be purchased as a standalone whole life policy for the child or as an add-on to a parent or guardian's life insurance policy.

The death benefit is typically $50,000 or less, but some insurers provide coverage of up to $500,000. Policies may contain a guaranteed insurability rider, which allows additional coverage to be purchased once the child reaches a certain age or passes a specific life milestone, such as getting married.

Most insurers will automatically transfer ownership of a whole life policy from a parent, grandparent, or guardian to the insured child once they become an adult. With a child life rider or add-on to a qualified adult policy, ownership is usually transferred later, at age 23 or 25, depending on the insurer. If the child wants to continue coverage, they will need to convert the original policy rider into a new whole life insurance policy.

There are several advantages to buying life insurance for a child. Firstly, it can provide a death benefit that can pay for funeral expenses or other expenses after death, allowing grieving parents to take time off work if necessary. Secondly, life insurance secured during childhood can make it easier and more affordable for the child to maintain coverage when they reach adulthood, especially if they have a family history of medical issues or end up in a risky profession. Thirdly, the cash value of a children's life insurance policy grows tax-deferred, meaning taxes are only paid on gains when they are withdrawn.

However, there are also some disadvantages to consider. Children are less likely to die young, so the death benefit may not be necessary. Additionally, coverage is typically low and may not meet the child's needs later in life. Furthermore, while the cash benefits are often promoted as a savings vehicle, other investment types generally offer higher interest rates.

When deciding whether to purchase children's life insurance, it is important to weigh the pros and cons and consider the family's financial situation and medical history.

Parents

However, it is important to note that the person being insured must consent to the policy and be involved in the application process. They will have to answer questions and, in most cases, take a medical exam. The only exception to this rule is if the policy is for a child.

Siblings

It is possible to take out a life insurance policy on a sibling if you can prove that their death would cause you financial hardship or loss. This is known as having an "insurable interest" in that person.

To prove insurable interest, you must demonstrate that you rely on your sibling financially and would suffer a significant financial loss if they were to die. For example, if your sibling is caring for your parents and you would need to hire someone to provide that care if they were to pass away.

In addition to proving insurable interest, you must also obtain your sibling's consent to take out a life insurance policy on them. They will need to be involved in the application process, answer questions, and, in most cases, undergo a medical examination.

It is important to note that the requirements for obtaining life insurance on a sibling may vary depending on your location and the specific insurance company. It is always a good idea to consult with a financial advisor or attorney to determine if this is the right decision for your situation.

Frequently asked questions