Life insurance is a valuable financial safety net that can provide peace of mind for you and your loved ones. While purchasing life insurance for yourself is a common decision, you may also want to consider purchasing a policy for someone else. However, buying life insurance for someone else is not as straightforward as it seems, as you need to demonstrate an insurable interest and obtain consent from the person being insured. In this article, we’ll discuss the requirements for purchasing life insurance for someone else and common scenarios in which you may consider buying life insurance for another person.
The Requirements for Purchasing Life Insurance for Someone Else
To purchase life insurance for someone else, you need to demonstrate an insurable interest in that person. This means that you would suffer financially if that person passed away. You cannot purchase life insurance for a stranger or someone you casually know. Insurers are wary of incentivizing individuals to shorten someone else’s life, so they require evidence that you would benefit from that person being alive.
The other requirement for purchasing life insurance for someone else is consent from the insured. The person you want to insure must be involved in the application process and go through the underwriting process. They will need to answer questions and take a medical exam, in most cases. The insured will also need to sign the application.
Common Scenarios in Which You May Consider Buying Life Insurance for Someone Else
There are several situations in which purchasing life insurance for someone else may make sense.
1- Your Spouse If you are the breadwinner and your spouse has no income of their own to pay for a policy, purchasing a life insurance policy for your spouse may be a practical decision. If you purchase the policy, you will also be the policy owner. However, you cannot take out a life insurance policy on your spouse without their knowledge and participation.
2- Your Business Partner If you have a business partner, you may have a buy-sell agreement that stipulates what happens to the business if one of you passes away. Life insurance is often used to fund the buy-sell agreement. Each partner buys a life insurance policy on the other, and the payout can be used to buy the deceased partner’s share of the business from surviving family members.
3- A Key Employee in Your Business If you own a business, you can purchase a key person or key employee insurance to insure an employee who contributes significantly to the business. If a key employee passes away, it could significantly impact your company’s revenues. A key person policy will help cover business liabilities while you find someone new to fill the role.
4- Your Child You can purchase life insurance for your child if you are the child’s parent, grandparent, or legal guardian and name yourself as the beneficiary. While the goal isn’t to provide a financial safety net for yourself, purchasing life insurance for your child guarantees they will be insurable even if they develop a health condition later in life. Additionally, permanent life insurance policies for children build cash value that they can access later in life if they choose.
5- Your Former Spouse If you are paying spousal or child support payments, you have a valid insurable interest in your former spouse. Purchasing life insurance for your former spouse is more common than purchasing it for your current spouse. Life insurance might even be ordered by the court during divorce proceedings.
6- Your Parents Purchasing life insurance for your parents may be a wise decision if they do not have insurance policies of their own. You may want to buy a policy to cover their final expenses or to ensure that their mortgage is paid off if they pass away.
Conclusion Purchasing life insurance for someone else is legal in certain situations. However, you must demonstrate an insurable interest and obtain consent from the person being insured.
However, it’s important to remember that taking out a life insurance policy on someone else should not be done without careful consideration and planning. You should consult with a financial advisor or insurance agent to discuss your options and determine the best course of action for your individual situation.
In conclusion, buying life insurance for someone else is possible, but it requires the person’s consent and a valid insurable interest. The insured individual must participate in the application process and undergo underwriting. This process ensures that the insurance policy is legitimate and not obtained through deceitful means. It’s important to have an open and honest conversation with the person you want to insure to make sure they understand the purpose and terms of the policy. When done correctly, taking out a life insurance policy on someone else can be a smart financial decision that provides peace of mind for you and your loved ones.