Life Insurance On Strangers: Is It Possible?

Life insurance is a financial product that pays out a lump-sum death benefit when the insured person dies. It's meant to provide financial support for someone who may need it after the policyholder's passing. Therefore, you can't purchase a policy on just anyone. To buy life insurance on someone else legally, you must be able to prove that you have an insurable interest in their life, meaning that you would suffer a financial loss or face some other form of hardship by their death. This typically applies to family members or business partners. Additionally, the person being insured must consent to the policy.

Consent from the insured is required

While it is possible to take out a life insurance policy on someone other than yourself, it is not possible to do so without the knowledge and consent of the insured. This is an important requirement, with obvious moral and societal reasons behind it. It also makes it impossible to insure someone without their consent. The insurance company would contact the insured about the relationship as well as for medical information to underwrite the policy.

The person being insured must be present for every step of the application process. They will need to sign a consent form and are likely to undergo a medical exam before the policy is approved. Phone interviews between the person being insured and the carrier are also common, as a means of confirming that the insured is comfortable with the policy and to confirm information on the application.

Even if a policy that doesn’t require a phone interview or medical exam is selected, failing to obtain consent from the person being insured would likely be considered insurance fraud.

In the case of a parent taking out life insurance on a minor child, the child may not be aware of the policy as they do not need to give consent.

Insurable interest must be proven

In addition to proving insurable interest, the policyholder must also obtain consent from the insured person. The insured person must be present for every step of the application process and sign a consent form. Without their knowledge and consent, it is not possible to take out a life insurance policy on someone else.

The insurable interest requirement also ensures that life insurance policies are not used unethically, such as gambling on the lives of others. By demonstrating insurable interest, the policyholder shows that they have a legitimate financial interest in the insured person's continued life.

When determining whether there is an insurable interest, insurance companies will assess the nature and extent of the policyholder's financial or emotional connection to the insured person. This may include proving that the insured person's death would result in a legitimate financial loss, such as the loss of income or increased financial responsibilities.

Ethical considerations

Insurable Interest: This is a critical ethical consideration when contemplating taking out a life insurance policy on someone else. It is essential to ensure that you have a legitimate and genuine financial interest in the person you plan to insure. Without a valid insurable interest, there could be moral hazards and conflicts of interest. The concept of insurable interest requires proving that you would suffer financial hardship or loss if the insured person passes away. This could include loss of income, increased financial responsibilities, or shared debts.

Informed Consent: Obtaining informed consent from the insured individual is of utmost importance. Respect their autonomy and privacy by ensuring they fully understand the insurance arrangement and its implications. Transparency and open communication are vital to navigating the ethical complexities in this situation. Failing to obtain consent can lead to legal issues and invalidate the policy.

Relationships and Trust: Consider the potential impact on relationships and trust. Taking out a life insurance policy without the knowledge or against the wishes of the insured person can irreparably strain or damage relationships. Open and honest communication is essential to maintaining trust and ethical integrity.

Values Alignment: Reflect on whether the insurance arrangement aligns with your personal values and ethical principles. It is crucial to consider the well-being of the insured and not solely focus on financial gain. Taking out insurance without regard for the insured's best interests raises significant ethical concerns.

Empathy and Responsibility: Approach the decision with empathy, integrity, and a strong sense of ethical responsibility. Consider the broader implications of the insurance arrangement beyond financial gain. Reflect on how the insurance policy may impact the insured's life and well-being.

Accurate Information: Ensure that all information provided during the application process, including health information, is accurate and truthful. Failing to disclose relevant health conditions or providing misleading details can result in denied claims or issues during the underwriting process.

Business partners and key employees

Each partner buys a life insurance policy on the other to receive a death benefit payout if the partner dies. That payout can then be used to buy the deceased partner's share of the business from a surviving spouse, children, or other family members. This type of agreement is known as a cross-purchase agreement.

Another type of agreement is an entity purchase or stock redemption agreement, where the business owner uses life insurance proceeds to purchase an owner's shares if they pass away.

Key employees are also considered to have an insurable interest in the business. If a key employee were to die, the business would suffer financially as it would be difficult and expensive to replace them. Therefore, business owners can buy what is known as key person or key employee insurance to insure an employee who contributes significantly to the business. The business typically pays the premiums on this type of insurance and is the beneficiary. The employee must consent to having a policy purchased for them and must go through the underwriting process.

It is important to note that insurable interest is only a requirement when the life insurance policy is first secured. Beneficiaries can be changed and ownership can be passed on once the policy is established. Additionally, the consent of the insured is required to purchase a life insurance policy on them, and they will have to undergo a medical examination as part of the application process.

Family members

Spouses and partners are the most common example of this. If you are married or otherwise committed to another person, you likely depend on one another financially as well as emotionally. This is an insurable interest that goes both ways. Indeed, spouses are always considered to have an insurable interest in one another, as one would likely have to settle final expenses for the other. If one spouse is a major breadwinner, their passing would be a financial blow, and so taking out life insurance to cover such a contribution is a natural protective step.

The insurable interest in one another can continue even if the union is gone. Divorce decrees often involve life insurance to cover alimony obligations should one of the parties pass away.

Parents often buy life insurance covering themselves to protect their children should there be an untimely passing. But in these times of increasing longevity, more and more adult children are having to take care of their aging parents. This often means commitments of time and money. Life insurance proceeds could help recoup the costs involved in such situations.

To that end, the child would have to demonstrate that they would suffer a financial loss—such as final expenses and debt settlements—should the parent die. The amount of insurance would have to be commensurate with the costs. For example, if your parent owes $180,000 on their mortgage and you want to take out a $200,000 policy to cover the mortgage debt and funeral expenses, then your insurable interest should be easy to prove. But you’d be hard-pressed to secure a $5 million policy on your parent in this situation.

Insuring a child can be a sensitive subject. Nevertheless, parents would suffer financial hardship in the event of their child's death, in the form of possible medical bills and final expenses, and so they have an insurable interest in their offspring. Beyond the notion of loss, there are other reasons to insure a child. The cost of life insurance is lower for younger people, and ownership can be transferred to them once they become adults. Securing a life insurance policy for a child, then, could provide benefits at a relatively low cost. Such benefits would include a guarantee of insurability in their adult years and some financial wherewithal for them in the future.

Some states have statutory coverage and age limits on life insurance for children. A financial professional can help navigate such requirements.

In the case of aging parents who rely on an adult child for support, there is an obvious argument that an untimely death of the child would have a negative financial consequence. And that doesn’t just apply to parents. Any aging relation—grandparent, aunt, uncle, cousin, sibling—that relies on a younger family member for support could make the same argument to secure a life insurance policy on them.

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