Can You Take Out Life Insurance On Someone Else?

If secretly taking out a life insurance policy on someone else shortly before that person meets with an untimely end seems like something that only happens in the movies, you’d be right. Insurers won’t let you buy a policy for another adult without that person’s knowledge.

That doesn’t mean purchasing life insurance on someone else is entirely off the table. It is legal to buy life insurance on another person in certain situations. And it can make sense to do so—without being the least bit underhanded.

How to Take Out Life Insurance on Someone Else

You can’t take out a life insurance policy on a stranger or even someone you just casually know. “You have to have an insurable interest in that person,” says Dennis LaVoy, founder of Telos Financial in Michigan. That’s one of the requirements for buying a policy for someone else. The other is consent.

Insurable interest: To buy a policy for someone else, you need to be able to show the life insurance company that you would suffer financially if that person died. To put it bluntly, insurers don’t want to incentivize someone to shorten someone else’s life. So they want to see that you benefit from that person being alive, LaVoy says.

Consent from the insured: The person on whom you are buying the policy—the insured—must be involved in the application process. He or she will have to go through the underwriting process, which involves answering questions and, in most cases, taking a life insurance medical exam. The insured will also have to sign the application, LaVoy says. The exception to this rule is if you’re buying life insurance for a child (more on that below).

Who Can You Buy Life Insurance For?

In certain situations, it can make sense for you to buy a life insurance policy for someone else. These are common scenarios in which the person you want to insure would be an insurable interest for you.

Your spouse

There are a few reasons why a spouse might want to buy a life insurance policy on the other spouse. The most practical reason would be if one spouse is the breadwinner and the other spouse has no income of his or her own to pay for a policy. If the breadwinner is paying for the policy, he or she might also want to be the policy owner, LaVoy says.

To be clear, you can’t take out a life insurance policy on a spouse without your spouse knowing and participating,

LaVoy says. Your spouse will have to go through the underwriting process and sign the policy as the insured. Even if you bought a simplified issue life insurance policy that didn’t require a medical exam, your spouse still would have to sign the policy.

Your business partner

It’s common for business partners to have a buy-sell agreement that stipulates what happens to the business if something happens to either of them.

“Think of it as a prenup for business partners,” says Henry Hoang, founder of Bright Wealth Advisors and Bright Life Insurance in California. Often, life insurance is used to fund the buy-sell agreement if one of the partners dies.

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.

A key employee in your business

If you own a business, you can buy what is known as key person or key employee insurance to insure an employee who contributes significantly to the business.

“If a superstar salesperson who brings in a majority of sales were to die, it would be a serious hit to company revenues,” Hoang says. “A key person policy will help the business owners cover business liabilities while finding someone new to fill the role.”

Typically, the business (rather than the business owner) buys the policy, pays the premiums and is the beneficiary, according to the Insurance Information Institute. The employee must consent to having a policy purchased on him or her and must go through the underwriting process.

Your child

You can buy life insurance for a child if you are the child’s parent, grandparent or legal guardian and name yourself the beneficiary. The goal isn’t to provide a financial safety net for yourself because you likely aren’t relying on your child for financial support. Instead, buying life insurance for a child guarantees the child will be insurable even if he or she develops a health condition later in life.

Life insurance policies for children, which are permanent life insurance policies, also build cash value that children can access later in life if they want. And if the child dies, the payout from the policy can cover funeral costs.

Unlike other situations when you buy life insurance on someone else, children don’t have to undergo a medical exam or sign the policy. It can be fast and easy to buy a policy for a child. However, it can be more affordable to add coverage for a child to your own life insurance policy with the purchase of a rider.

Your former spouse

It’s actually more common for people to buy a life insurance policy on a former spouse than a current spouse, LaVoy says. If the divorced spouse is getting spousal support or child support payments, he or she has a very valid insurable interest in the ex-spouse who is providing that support.

In fact, the purchase of life insurance might be ordered by the court during divorce proceedings, LaVoy says.

Your parents

Taking out an insurance policy on your parents could make sense in a variety of situations. If they don’t have insurance policies of their own, you might want to buy policies to help cover funeral costs and final expenses for them. If you’re a co-signer on any of their loans, taking out policies on your parents would help you pay off those debts when they die.

It also could be a smart financial move to buy life insurance with long-term care benefits for your parents if you’re worried about their ability to pay for any long-term care they might need, Hoang says.

If you’re inheriting substantial assets that will be subject to estate taxes, a survivorship life insurance policy on parents can supply funds to pay the tax bill.

Your sibling

You might have an insurable interest in a sibling if your sibling is caring for one or both of your parents, Hoang says. If your sibling were to die, you would need to hire someone to care for your parents if you weren’t able to yourself. By taking out a policy on your sibling, you could name yourself the beneficiary of the policy and get a payout that would help cover the cost of your parents’ care.

Get Help Buying Life Insurance

Before buying a life insurance policy for someone else, it’s best to work with a financial advisor or attorney to determine whether this is the right move for your situation. If it does make sense, then contact an independent insurance agent to find the right policy. Independent agents work with several insurance companies and will know which one has the best policy for the person at the best rate.