Getting Life Insurance For Someone Else

It is possible to take out a life insurance policy on someone else, but there are certain conditions that must be met. The first is that the person taking out the policy must have an insurable interest in the person they wish to insure. This means that they would suffer a financial loss if the insured person were to die. For example, if the insured person is a family member, business partner, or co-signer on a loan, then the policyholder would have an insurable interest. The second condition is that the insured person must consent to the policy and be involved in the application process, including signing forms and possibly undergoing a medical exam. It is not possible to take out a secret life insurance policy on someone else.

Spouses and partners

If you are married or otherwise committed to another person, you likely depend on one another not only emotionally but also financially. This is an insurable interest that goes both ways. Indeed, spouses always have an insurable interest in one another, since one would likely have to settle final expenses for the other.

Obviously, if one is a major breadwinner, then their passing would be a particularly hard financial blow. Buying life insurance to cover such a contribution is a natural protective step.

Not so obvious, perhaps, is the contribution of a partner who may not be in the workforce, like a stay-at-home parent. Or, in these sandwich generation times, the value of a partner staying at home to help care for an ageing loved one. The loss of their contributions is often an underappreciated financial blow.

Adding up the exact value of all the caregiving — plus various housework, cooking, errands, and other associated chores — a stay-at-home partner provides will differ from household to household. But, as a comparative point of reference, a 2019 survey found that stay-at-home parents would earn nearly $178,200 per year in the workplace. And home health aides cost an average of $5,148 monthly.

And 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

It is important to note that the insured must sign the life insurance application, giving permission for the insurance company to collect their data, such as medical history and hobbies. The insured may also have to undergo a life insurance medical exam as part of the application process.

Children

Parents can take out life insurance policies on their children, and grandparents can do the same for their grandchildren. This is known as having an "insurable interest" in the child, which means that the child's death would have a financial impact on the policyholder.

Life insurance for children is generally offered in the form of term or whole life insurance. Term life insurance provides coverage for a set amount of time, while whole life insurance provides coverage for the child's entire life.

The pros of life insurance for children include:

• Guaranteed future insurability, even if the child develops a serious medical condition.
• The ability to claim cash value or take out loans on the policy's accrued cash value, which can be used to assist with college tuition or a down payment on a first home.
• Help with covering funeral costs in the event of the child's death.

The cons of life insurance for children include:

• Poor rate of return, as children have lower rates of mortality.
• Long-term expenses, such as lifelong premium payments.

When considering life insurance for a child, it is important to weigh the pros and cons before making a decision. It may be more cost-efficient to add a child rider to an existing policy than to take out a separate policy for the child.

Business partners

There are two main types of buy-sell agreements:

• Cross-purchase agreement: Each partner purchases life insurance on the others. If one owner dies, the others use the death benefit to buy the deceased's company shares.
• Entity purchase plan: The business buys a life insurance policy on each owner, and the death benefit is used to purchase their shares if one dies.

Key person life insurance is another type of business life insurance. It is designed to protect the business if the owner or another critical employee passes away. The business pays the insurance premiums and is the beneficiary of the policy. The death benefit can be used to cover business loans or losses, buy back the deceased's shares, cover the cost of replacing the employee, or provide severance to staff if the business closes.

When taking out life insurance on a business partner, the insured must sign the application and consent to the insurance company collecting their data, such as medical history. They may also have to undergo a medical exam.

Siblings

It is possible to take out a life insurance policy on a sibling, but there are certain requirements that must be met. Firstly, you must be able to prove that you have a financial connection with your sibling. This could be the case if your sibling is the primary caregiver for your dependent parents, or if they have children for whom you would be responsible in the event of their death.

Secondly, your sibling must consent to the policy and cooperate throughout the application process, including agreeing to a medical exam and answering application questions. Without their consent, you will be unable to take out a policy on their life.

If you meet these requirements, you can then follow the steps to buy life insurance for your sibling:

• Determine the amount of coverage needed, considering any outstanding debts, future expenses, and income replacement.
• Research policies and insurers that offer the coverage amount and type that meets your sibling's needs and budget.
• Gather necessary information, including your sibling's personal and health information, such as their age, medical history, and lifestyle habits.
• Apply for the policy, which may include a medical exam and underwriting.
• Name your sibling as the beneficiary, specifying the percentage of the payout they should receive.
• Pay the premiums to keep the policy in force.
• Review and update the policy regularly to ensure it still meets your sibling's needs.

It is important to note that life insurance is not just for those who are older or nearing the end of their lives. Purchasing life insurance for a sibling can add an extra layer of security for the beneficiary, providing peace of mind for both parties.

Frequently asked questions