Can you insure others like your Father or Mother?
I have been serving clients in the insurance and financial industry for over 35 years. During this time, I have learned it is important to pay attention to the common questions my clients ask. I have found that if two or more people have the same question there are many others with the same question. Recently questions about how to take out policies on loved ones are becoming common. This in part may be due to Covid-19 forcing people to think more about mortality. We have created this post to help you understand whose life you can have insured and how to apply for a policy.- Terms you need to know.
- Is it legal to get a policy on someone else’s life?
- What you need to have before you complete an application.
- Common examples of lives you can insure.
Terms you need to know
Insurable interest
This refers to the financial loss the beneficiary will have due to the loss of the insured person.
The beneficiary
This is the person(s) or entity(s) named in the policy as the death benefit recipient(s) upon the death of the insured.
The insurance company
The company that issues the policy, receives the premium payment and pays benefits.
The insured
This is the individual whose life is covered by the life insurance policy. The death of the insured will trigger the payment of the death benefit.
The policy owner
The person or entity that owns the policy maintains the contractual rights of the policy. For example, they can determine the beneficiary and whether to cancel the policy.
The policy payor
A person or entity that pays the necessary premium to keep the policy in force.
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Legality
Is a policy like this legal?
Yes, you can get an insurance policy on someone else, it is legal and quite common.
Yet, you cannot take out life insurance policies for the wrong reasons.
You can use life insurance to ease the distress of an unexpected loss of life. But cannot use it to bet on or profit from the unfortunate circumstances of others. For example, you’re not allowed to get insurance on your neighbor because she’s 85 and you think she may die soon. The most important thing here is an insurable interest. It is a basic requirement to make any life insurance contract valid. The law creates protections against persons betting on the lives of others. Any policy considered lacking in insurable interest is both invalid and illegal. When you insure someone else’s life the contract setup is different. In normal insurance policies the owner, payor, life insured and beneficiary are all the same person. But when insuring other people the life insured is someone other than the owner or payor. For the application to be accepted you must prove insurable interest if not immediate family. The insured individual must sign for the policy and verify their medical information. They must pass any medical tests the provider needs. They must also sign the final documents before the contract is issued.
Here are some common examples of people you can insure.
Your spouse or a life partner
If your spouse doesn't earn an income and cannot buy their own policy you can buy it on their life with you as the beneficiary. This can help with expenses such as child care.
Your dependent child
Usually, parents buy whole life insurance as a long-term gift because of the cash value component. Dependent children do not usually have an insurable interest in their parents so it is usually unnecessary. Yet it can cover the cost of their funeral expenses. A child protection rider can also cover this cost if you already have an insurance policy to add it to.
Your adult child
If you have co-signed private loans such as mortgages, car loans, or credit cards with your children. You may want to take out a life insurance policy to pay off those loans if your child dies.
Your sibling
While it is unusual for you to have an insurable interest in your sibling, there are some cases in which you might. For example, if your sister takes care of your parents and she dies, your parents would lose their care
Your mother or father
Many people take out a type of life insurance called final expense life insurance to pay for their parents’ funeral expenses when they die. Taking out a life insurance policy on your parents can be a lot more difficult because it is hard to prove that you have an insurable interest in your parents. The best option to help your parents receive coverage is to encourage them to apply for their own policy and list you as the beneficiary.
Your former spouse
Even after a separation or divorce, it’s common for ex-spouses to have shared assets or dependents. If you or your children still depend on your former spouse for income or childcare, consider taking out a policy on them. You can name yourself or your adult children as beneficiaries. Sometimes, during divorce proceedings, a judge may require life insurance as part of spousal support.
Your business partner
If you own and operate a business with a partner, you could buy a policy on your business partner. You name yourself as the beneficiary and you would use the payout to keep the business running.