When Can You Buy or Own Life Insurance on Someone Else’s Life?
By Shane Flait ©2011
A person generally buys a life insurance on his life to supply the death benefit – cash - to his beneficiary when he dies. But can anyone buy or own life insurance on someone else’s life. That’s what this article addresses.
Owning a life insurance policy represents a value you can use. It might have a cash value you can access today, or cash that you can receive only when the person whose life is insured dies. In the latter case, it may happen that a beneficiary can receive a large death benefit after only a few premiums are paid by the owner when the insured dies; and the owner may be the beneficiary. Does that make buying life insurance on someone else’s life a way to gamble to make money on someone’s death?
No, because only those who can buy life insurance on someone’s life must be – before buying the insurance - in a position of loss if the insured person should die. That means only those who have an ‘insurable interest’ in a person can buy insurance on that person’s life.
Conditions necessary for you to buy life insurance on someone else
Yes, you can buy, pay the insurance premiums and collect the death benefit on a life insurance policy that insures a life that is not your own. But you must fulfill two conditions for the insurance company to sell you a policy.
First, you need the consent and participation of the person whose life is being insured; and second, you need to provide a reason why YOU will be adversely affected financially by ‘the insured’s’ death – i.e. an ‘insurable interest’. The only exception to these is when parents buy life insurance on their minor child.
So, if you have nothing to lose from the death of a person, then you don't really have an "insurable interest" in his life and, therefore, will only gain from the death of the insured. If that’s the case then it’s illegal for an insurance company to sell you a policy on someone else’s life.
It’s very difficult for someone to buy life insurance on you without you knowing about it. They need your consent and participation; and they must show an insurable interest in you. Most often the life insurance policy requires a medical test on the insured which you’d notice!
if that person purchased some kind of simplified issue or guaranteed issue policy without you knowing about it, he’d be committing insurance fraud which is a felony and would void the policy.
Examples of ‘insurable interests’
Everyone has an insurable interest in his own life. So he can buy insurance on himself. He can assign his death benefit to anyone for whatever reason he wants. But he can’t commit suicide to produce his death at least for a couple of years - depending on the policy wording.
Husbands and wives can buy life insurance on each other’s life since by the nature of the marriage contract, each has living obligations to the other while each is living. …Or it used to be that way!
Simply being a relative doesn’t necessarily create an insurable interest for you in the life of that relative. You have to prove you’re adversely affected financially by that relative’s death. If that relative was taking care of you or supplying income for you, then you’d have an insurable interest in preserving those benefits – or their equivalent - if he died.
Lastly, a company may buy life insurance on its key employee to recover from the financial setback that his death can cause to the company – a common occurrence.
Can you transfer ownership of a policy on your life to someone else for cash?
Yes you can. If you originally purchased a policy on yourself, then you can usually transfer the ownership of it or change the beneficiary to whoever you wish. That’s because you own the policy and it has a value you can transfer just like any other thing you own.
But, of course, you had to prove that the initial beneficiary - perhaps yourself - had an insurable interest at the time the policy was created. That’s what makes life settlements legal.
Life settlements are common today. You can sell your life insurance policy to someone else for cash. The buyer puts himself down, then, as the policy beneficiary. But of course, the buyer paid you cash and is paying the remaining premiums – if it’s not a paid up policy – for the policy death benefit when you die.
Once the two conditions are fulfilled at least initially, the insurance company is happy – no matter who pays the premiums - to pay the death benefit to whoever the beneficiary is.
Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com