Purchasing life insurance for someone else and designating yourself as the beneficiary may sound like the premise of a film noir mystery. However, taking out insurance on another person is perfectly legal, and it might occasionally make good financial sense.
However, whether you can do so is determined by your relationship with the insured, and you will need their permission.
Buying life insurance on someone else: The rules
In order to purchase a policy for someone else, the life insurance beneficiary (the person who receives the payout) must have an “insurable interest” in the person covered by the policy. This means that the recipient must suffer an economic loss when the covered individual dies.
For example, you can get life insurance for a family member, domestic partner, or business partner. However, you cannot get a life insurance policy for a mere acquaintance or stranger.
And you can’t secretly buy a life insurance policy on someone else.
The person whose life is insured must sign the life insurance application, allowing the insurance company to collect information such as their medical history and hobbies. In addition, as part of the application procedure, the individual may be required to take a life insurance medical exam. You cannot expect to obtain coverage without the insured person’s input.
The benefits of buying coverage on someone else
The key reason to purchase the coverage yourself rather than having someone else do it and identify you as beneficiary is to have control over how the policy is managed.
The buyer, or policy owner:
- Receives statements and is liable for paying premiums.
- Has the authority to name or change the beneficiary of the policy.
- If you have whole life insurance or another type of permanent policy with cash value, you can take out loans against it or surrender it for cash.
Examples of when to buy coverage on another person
Here are a few circumstances in which purchasing life insurance for another person can be advantageous.
You want to handle your parents’ insurance as they age. Whether you rely on your parents financially or require additional income to pay for funeral expenses, you can purchase life insurance for them to assist cover costs when they die. As the owner, you pay for and manage the insurance so they don’t have to.
You cosigned for a loan. If you co-sign on someone else’s loan, you will most likely be accountable for the remaining amount if the borrower dies. If repaying the debt on your own would be difficult, consider purchasing life insurance for the borrower and naming yourself as the beneficiary.
You have children with an ex-spouse or former partner. If you get alimony or child support from an ex, you might consider purchasing life insurance to help replace that money if your former partner dies. This is often included in divorce decrees.
You have business partners. Life insurance can be a valuable tool for financing a buy-sell deal. This occurs when company partners get life insurance for each other and name themselves as beneficiaries. If one partner dies, the surviving partner can use the life insurance proceeds to purchase the late partner’s portion of the business.
