Most life insurance policies are purchased by the policyholder and designed to insure their own life, with proceeds from the policy going to their named beneficiaries. However, insuring yourself is not the only scenario in which someone would purchase a life insurance policy.
In many situations, a deceased individual’s family and loved ones take on their outstanding financial obligations. You may find yourself in this situation under a variety of scenarios:
- You Acted as a Co-Signatory on Loan: Family members who have co-signed on a loan for a now-deceased person, such as for a car, assume the sole financial liability of the incurred debt.
- You were Married to the Deceased: In community property states like California, the surviving spouse assumes the deceased’s financial obligations. Still, other states that do not have community property laws may require you to pay off your family members’ outstanding loans, particularly medical debt.
- You were Legally Responsible for the Estate: Family members and loved ones often take legal control over estates to help the soon-deceased make sound financial and legal decisions. This situation generally occurs if they lose control of their faculties or cannot manage their affairs. In this scenario, the head of the estate assumes control of their financial obligations when they die if the head of the estate does not correctly follow probate laws.
To insulate yourself from paying thousands of dollars (or more) to pay your loved one’s debt, you may want to consider purchasing a life insurance policy on them. However, you’ll need permission, documentation, and consent.
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Requirements for Purchasing Life Insurance for Someone Else
The first requirement when purchasing insurance for someone else is proving that you have an insurable interest. Insurable interest implies that you would suffer financial loss if the person you want to insure dies. For instance, you may qualify if you have a significant other living with you and they pay half of your bills.
The second requirement in taking out insurance for someone else is their consent. In many situations, it goes beyond simple consent. The person you’re taking the policy out on will need to complete many health forms and possibly have a life insurance medical exam.
How the Process of Buying Life Insurance for Someone Else is Different
To better understand how taking out a life insurance policy on someone else works, it’s a good idea to look at policies in general. However, to better understand how life insurance policies function, it’s best first to take a look at the roles of various individuals within a policy:
- The Policyholder. The policyholder is the person who owns the insurance policy, meaning they’re the one who created the policy and usually makes the payments on it.
- The Insured. The insured is the person covered by the policy.
- The Beneficiary. The beneficiary is the person who receives the payout if the insured person dies. When purchasing a life policy on another individual, this is often the same as the policyholder.
When you take out a life insurance policy on yourself, you’re both the policyholder and the insured, and you name someone else to be the beneficiary upon your death. In contrast, when you take out a life insurance policy on someone else, you’re the policyholder and usually the beneficiary.
Even though there are three main entities’ names in a life insurance policy, only two prominent people are usually named. For instance, you cannot take out a life insurance policy on your business partner and name your child as the beneficiary if your business partner dies. Although that might seem logical, it changes the nature of the policy, and it loses its tax-free status and becomes a taxable gift.
In the above situation, if you want your child to have some financial benefit, you can appoint your child as the secondary owner of the policy and a contingent beneficiary. Being a contingent beneficiary puts them in the position of the second beneficiary in line. In this case, your business partner dies, and you are first in line to get the payout from their life insurance. Still, if you and your business partner die simultaneously, your child is the second beneficiary, and they will receive the payout.
Due to the complicated nature of these arrangements, it’s best to pay special attention to who expressly assumes these roles during the paperwork process.
Who Can You Buy Life Insurance For?
To purchase a life insurance policy for another, you have to prove a financial tie between the two of you or prove that they’re family through blood, legal standing, or relationship status. You may qualify if you have a financial interest in someone who falls into one of the following categories:
- Your spouse: Insuring a spouse makes sense in most situations, but you can also insure an ex-spouse, mainly if you rely on their income to support yourself and your children. Having children often prompts people to have life insurance policies, to add a layer of financial protection for their children’s needs should anything happen to a parent.
- Your children: Occasionally, parents rely on children for their financial needs or want a policy to help them pay for funeral bills and other expenses. Parents may also want financial protection if their minor child dies prematurely.
- Your siblings: Taking out life insurance on siblings is not common, but possible if a sibling’s death would have a significant financial impact on your life. You may qualify if your sibling contributes to your living expenses or if they financially care for your children or grandparents.
- Your parents: Taking out a life insurance policy on your parents is uncommon but possible. One reason is that adult children usually lose insurable interest in their parents.
Taking out a life insurance policy on a business partner often makes financial sense. In many business partner situations, a buy-sell agreement shifts the business to the remaining individual upon the other person’s death. A vital part of a buy-sell agreement is a life insurance policy that covers the buy-out.
Proving insurable interest in a business partner is not difficult, and taking out a life insurance policy doesn’t have to be part of a buy-sell agreement. It can stand independently, but you’ll still need approval from your partner before taking out a policy.
Why Buy Life Insurance for Someone Else?
Generally, if you are considering buying a life insurance policy for someone else, it is because they do not have their own. It’s not uncommon for someone to resist purchasing one for the following reasons:
- Cost: Probably the biggest reason for not wanting to take out a life insurance policy is that it comes with regular premiums, meaning you’ll be paying for it. Some people don’t see any benefit in paying for life insurance so someone else can benefit from their death.
- Applying: Selecting a life insurance policy is complex, time-consuming, and highly personal. Between the effort involved and the divulgence of their information, it may not seem worth the trouble.
- Fear: Most people don’t want to think about their death. Additionally, because many insurance policies require a medical exam, many are afraid of uncovering a previously unknown medical issue.
- Unnecessary: Some may believe that they don’t need life insurance. Occasionally, they may be right. However, that depends on their financial situation and your financial stake in their affairs.
Can You Buy Life Insurance for Someone Secretly?
Generally, it is not possible to secretly buy life insurance for another adult, and they cannot take it out for you. The reason is that consent is one of the most critical factors determining one’s ability to take out life insurance on another. However, note that taking a policy out on a minor child is possible.
One situation where you might be taking out a life insurance policy on someone without their knowledge or consent is if they’re your minor child. In this case, you are their legal guardian, so you are responsible for these decisions.
How to Buy Life Insurance for Someone Else
If you’re considering buying a life insurance policy for someone else, you’ll need to prove an insurable interest and the consent of the individual in question.
Once you prove insurable interest and know you have consent, it’s time to shop around. Life insurance can be complex, and there are many different options. Make sure you’re comparing the length of the policy, any cash value amounts if it’s a permanent life insurance policy or term life, etc. Knowing and understanding the policy’s details is key to making a good choice.
When you’ve decided what type of policy you think is best, you can start shopping for quotes.
Prices are highly variable, so shopping around to get the best quote is in your best interest. Once you’ve found coverage at a reasonable price, can provide consent/insurable interest, and receive the signature of the person in question, the policy is yours.