Can you buy life insurance on someone else and under what conditions is this permitted? Let`s clarify when - and only when you can.
Yes, you can buy life insurance on someone else!
You are allowed to pay the premiums and collect the benefits on a life insurance policy that insures a life that is not your own when you have an insurable interest in that person. As an example, a company may buy life insurance on its key employee to recover from the financial setback that his death can cause to the company. Another example would be a wife buying life insurance on a husband or a son on a father.
But you must fulfill two conditions for the insurance company to commit to a policy.
- You need the consent and participation of the person whose life is being insured (i.e. Their signature)
- To provide a reason why you would be adversely affected financially by the insured's death.
The only exception to these is when parents buy life insurance on their minor child (a purchase this author advises against as needless).
So, if you have nothing to lose from the death of the person, then you do not really have an "insurable interest" and therefore will only gain from the death of the insured. If this rule were not in effect, you can see how nefarious individuals could abuse the purchase of life insurance.Simply being a relative doesn't necessarily create an insurable interest. You have to prove you are adversely affected financially by that relative's death. There has been a recent concern about stranger owned life insurance, a racket, while legal, has detrimentally cost the insurance industry millions of dollars in benefits to those who may not deserve it.
Buy life insurance on someone else for estate planning
It is common to buy life insurance for estate planning purposes. You may go to do this and find that you're uninsurable; this is a common experience with people of older ages, say 65 or over. The goal of the life insurance policy is to pass tax-free death benefits to your children. In such a case, you may decide that placing a policy on your brother's life, who is just a year older than you, would accomplish the same goal and this may pass muster with the insurance company even though your children do not have an insurable interest in their uncle.
What about someone buying life insurance on you to collect the death benefit when you die?
From what was said above that's very difficult without you knowing about it. The buyer needs 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 would probably notice!
Even if that person purchased some kind of simplified issue or guaranteed issue policy without you knowing about it, then he would be committing insurance fraud which is a felony and would void the policy.
Can you transfer ownership of a policy on you?
If you originally purchased a policy on yourself, then you can usually transfer the ownership of it to anyone or change the beneficiary to whoever you wish. That's because you own it. But you have to prove that the initial beneficiary had an insurable interest at the time the policy was created. But once the policy is issued, it can than be sold to a stranger ("stranger owned life insurance"). That is what makes life settlements legal. However, some states are outlawing the practice of investors approaching seniors to have them buy life insurance and then immediately sell the policy to the investor.