Buying Life Insurance on Someone Else’s Life

buy Life Insurance for somebody else

People often wonder if you can take out life insurance on someone else. The simple answer is yes. However, only certain situations will be approved. There are multiple situations where buying a life insurance policy for someone else makes sense, both in a personal and business setting.

Personal

Life insurance companies will not allow someone to purchase a policy on a stranger. This is referred to as “stranger-owned life insurance” (STOLI). The criteria to own a policy for someone else is called insurable interest.

Anyone who is a dependent, or has dependents would have no trouble having an insurance policy on the other. Such as a couple, parents and children, grandparents and grandkids, etc.

Couples

Married and unmarried couples often purchase life insurance on one another. There is usually no need for one spouse to own a policy on the other, rather the insured can own their policy. However, from time to time, it does make more sense, and it is not an issue. Just make sure that the owner in this situation would also be the beneficiary to avoid tax issues, as explained later.

Parents and Grandparents

People will often purchase policies on their kids or grandkids. These will usually be permanent policies such as whole life or universal life. The logic behind this would be to lock in the child’s rate at a young age, as life insurance premiums constantly go up based on the age at purchase. This also provides a savings vehicle that the parent or child can use later on for expenses such as college tuition, a wedding, or purchasing a home.

Term life insurance policies do not usually make sense for children, as very rarely will minors be financial providers for their families. Temporary insurance policies have very few built-in living benefits. However, if someone does specifically want a term policy for their young child, a rider can be added onto the parents policy, often on a guaranteed basis, to provide term coverage for the children.

A child or grandchild may also want to get a policy on their parent or grandparent, especially if they are dependent on them, and would take a financial hit if they were to pass. Additionally, if they are expecting to inherit a large sum of money and will be hit with an estate tax, a tax-free life insurance policy would be very handy.

Life Insurance for a Dying Relative

Life insurance should be bought while one is young and healthy for two reasons. One, you never know when tragedy can hit. Two, the price is lowest when you have the lowest statistical chance of needing the policy payout.

Many people do not think about life insurance until it is too late, such as their relative is on their death bed. At that point they often ask, “Can you get life insurance on someone who is dying?” If the ill person is in a coma or not in their full mental capacity, they may ask, “Can you get life insurance on someone without them knowing?”

The answer to both questions, surprisingly, is yes, it is not illegal to get life insurance on someone else in certain instances. However, you won’t exactly strike it rich off of these policies. The only policy one can purchase on a deathly ill person is a guaranteed issue policy, which has a graded death benefit.

A graded death benefit means that within the first few years, usually the first two, the full death benefit does not apply to natural death. Rather a couple percentage points will be returned to the beneficiary along with premiums upon the death of the insured.

The death benefit on these policies usually tops out at $25,000 as well. So, if someone is likely to die within two years, it is most likely not a wise purchase.

If a power of attorney is assigned, a policy may be purchased on an insured without their knowledge as well.

“The Unholy Trinity”

When purchasing a policy on someone else, it is very important to make sure that the owner, insured, and beneficiary are not three different people. Two of the three should be the same, and having the insured and beneficiary does really make sense, so the owner should also be the beneficiary.

If a policy has a different owner, insured and beneficiary, it will lose its tax free status and will then be considered a taxable gift.

You may appoint a secondary owner and contingent beneficiary so that if something happens to the original owner, who is also the beneficiary, this secondary individual will be able to take the reins. A common example of this would be when an older grandparent purchases a policy for a young grandchild. There is a chance that the grandchild will not yet be 18 at the time of the grandparent’s death. Therefore, the parent can be appointed as owner until they eventually pass the policy onto the child.

The Unholy Trinity.

Business

There are three main reasons why a policy will be purchased on someone else’s life for business purposes:

  1. To fund a buy-sell agreement
  2. To provide executive benefits
  3. “Key-man” policies

Buy-Sell

A buy-sell agreement is when partners or multiple owners enter into an agreement that upon the death or disability of one of them, they will sell their portion of the business to the other(s) at an agreed-upon amount.

The amount needed for this payout can be astronomical, and taking it from business accounts can significantly hurt cash flow. One common strategy is to fund the agreement with an insurance policy. A life insurance policy would pay the benefit to the deceased’s heirs if they were to pass, and a disability policy would do the same in place of a debilitating accident.

Executive Benefits

A business owner may want to grant a life insurance policy to their star employees or themselves to help facilitate retirement savings or provide for the family in case of an early death. There will usually be certain stipulations regarding the vesting of the policy depending on the tenure of the employee and other factors.

This can be done within a qualified plan such as 401k, or be a regular purchase. The various tax ramifications are discussed at length in this article.

Key Man

A “key man” is anyone that the business relies heavily on and would suffer a large financial burden if they were to pass. Upon the death of this specific employee, businesses would likely need to find a new highly qualified person and retrain them. During this time the revenue of the business would likely take a hit. Key-man policies are meant to alleviate this loss.

Another use for these policies is to cover a business loan. Many times, specifically for small business loans (SBA loans), part of the contract is a key-man policy on the owner. The policy is then collaterally assigned to the bank or lender. If the owner passes during the term of loan, prior to repayment, the balance would go directly from the insurance company to the debtor.

FAQs

  • Can a friend buy life insurance on a friend?

    Life insurance requires an insurable interest, in other words, a financial interest. If you provide for each other financially, a life insurance policy would probably make sense.

  • Can anyone buy a life insurance policy on someone else?

    No, there needs to be insurable interest.

  • Can I buy a life insurance policy for a family member?

    Yes.

  • Can I buy life insurance for a friend?

    As long as there is a good reason why it is needed, you can buy a policy for a friend.

  • Can I buy term life insurance on someone else?

    If you have an insurable interest, absolutely!

  • Can I cancel a life insurance policy someone has on me?

    Unless this person has power of attorney, or you consented to the purchase, they should not have a policy on your life. If they do anyway, you should be able to get the company to cancel it. If you did consent to the policy originally and have now changed your mind, then it would depend on who the owner of the policy is. If it’s you, then you should be able to cancel the policy, provided it is not collaterally assigned. If they own the policy, then you most likely do not have any recourse. You should speak to a lawyer if this situation applies for their expert opinion.

  • Can I get life insurance on my boyfriend?

    If it is a serious relationship that includes financial responsibility, absolutely. Life insurance companies do not require a marriage certificate etc. to get an insurance policy.

  • Can I insure another person’s life?

    Yes, if you have insurable interest.

  • Can I take life insurance out on my partner?

    Yes.

  • Can life insurance be transferred to another person?

    Yes.

  • Can someone take life insurance out on you?

    If they have your consent or legal guardianship over you, yes.

  • Can someone take out a life insurance policy on me without my knowledge?

    Unless they are your legal guardian, they are not supposed to be able to. That being said, unscrupulous people do unscrupulous things sometimes, and they often get away with it.

  • Can you buy life insurance if you are terminally ill?

    Yes, you can get a guaranteed issue life insurance policy.

  • Can you buy life insurance on a parent without their consent?

    You cannot get life insurance on a parent unless you have power of attorney.

  • How do you get life insurance on a relative?

    It would be best to reach out to a broker like Sproutt.com with your relative and fill out the application together.

  • Is having life insurance on someone else illegal?

    No.

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