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Can You Take Life Insurance Out on Someone Else

Family life insurance plan

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Lee Huffman
Updated August 3, 2022
4 Min Read

Life insurance is typically bought to cover a person's loss of income or to pay off a debt when they pass away. However, life insurance death benefits can also be used to pay for funeral expenses, pay off a co-signed loan, or help a business recover from the loss of an owner or key employee. With this in mind, life insurance companies do allow people and businesses to take out life insurance on someone else. The big caveat is that the person whose life is covered has to agree to you owning the policy.

How to take out life insurance on someone else

When taking out life insurance on someone else there are certain policies and procedures that must be followed. Number one of these policies is that the person whose life you are insuring must know about it. You cannot purchase a life insurance policy on another person's life without their approval.

Many life insurance policies require an interview or physical exam, so it would be nearly impossible to do so even if this requirement wasn't in place. If you were able to purchase a policy on someone else's life without their consent, you would be committing insurance fraud which could result in a denial of claims, canceled policies, prosecution, or a combination of these outcomes.

The insurance company will also inquire about your "insurable interest" for taking out life insurance on someone else. In simple terms, you have to explain your financial burden should the insured person pass away. Examples include a loss of income for your family, paying for the burial costs of your friend or family, or paying off a debt that you're a co-signer for. For business owners, this could mean buying out a partner's interest in the company or covering the loss of an executive, salesperson, or an important employee.

Who can you buy life insurance for?

There are many reasons why you would take out life insurance on someone else. Here are a few of the most common reasons and why it makes sense to do so:

  • Your spouse or life partner. Whether your spouse works outside the home or does not have a traditional job, their death impacts your family's finances. You may need to replace their income or hire someone to handle many of the tasks they currently take care of.
  • A young child. While purchasing life insurance on a child is not recommended by most advisors, some parents choose to buy a policy for their child to cover unexpected funeral expenses or to build cash value inside of a life insurance product.
  • An adult child. Parents often co-sign loans for their adult children while they are building their credit score or finances or while they are in school. Having a life insurance policy in place on your adult child provides the means to pay off that loan in case they die.
  • Your sibling. While most people do not have a shared financial obligation with their siblings, some families rely on one family member to take care of aging parents. In this scenario, purchasing a life insurance policy for that sibling will ensure that there is money available to take care of your parents if your sibling passes away.
  • Parents. Buying a life insurance policy for your parents is a good way to cover end-of-life expenses. Additionally, these policies ensure that a living parent is taken care of without burdening your finances in case the deceased parent wasn't adequately insured.
  • A former spouse. When you get divorced, it is common that ex-spouses share financial obligations for children, property, or other scenarios. Having a life insurance policy on your former spouse ensures that these obligations are met, even if you die prematurely. In some cases, the court may decree that you have to pay for the insurance premiums of your ex-spouse.
  • Business partners or key employees. Businesses often purchase life insurance policies for partners or employees that are integral to the company's success. These policies are often referred to as "key man" insurance policies. Business partner policies typically help the remaining partners buy out the financial interest of the deceased partner's spouse. While policies on employees help the company regain its footing in the event the employee passes away unexpectedly.

Frequently Asked Questions (FAQ)

Can someone take out a life insurance policy on me without my knowledge?

No, insurance companies are not supposed to allow someone to buy a life insurance policy on you without your approval. If the policy were purchased without your consent, when the insurance company found out, multiple things could happen. It could deny paying out the death benefit, cancel the policy, or seek prosecution against that individual for insurance fraud.

Can you take out a life insurance policy on another person?

Yes, this happens more often than most people realize. Many insurance policies today are owned by one person or company, while covering the life of another person. These policies are often used to cover funeral expenses, pay off co-signed debt, or help a business handle the loss of a key employee.

How do I take out a life insurance policy on a family member?

The life insurance application process is nearly the same as if you were the policy owner and the insured. However, with multiple people involved, the person whose life is being insured has to consent to the policy. They must sign off on the policy, answer the requisite questionnaires, and undergo physical exams. Additionally, most life insurance companies want the policy owner to explain what financial interest they have in the life of the person being insured.

Can you buy life insurance on a parent without their consent?

No, you cannot buy life insurance for anyone without their consent. Although you may be well-intentioned, the best approach is to have a conversation with them. Get their buy-in before proceeding with the proposed life insurance. It will make the process go smoother and avoid any problems down the road.

Is it illegal to buy life insurance on someone else?

No, it is not illegal to buy life insurance on someone else. As long as that person consents to the policy, there is no problem. If they do not give their permission and you proceed anyway, you could be charged with insurance fraud.