Can I buy life insurance for someone else?
While it is most common to buy insurance for yourself, there are certain circumstances where it can be beneficial to buy a life insurance policy for someone else. For instance, to cover a family member or business partner. The key stipulation is that the policyholder has an insurable interest in the insured and has been given explicit consent by the insured.
It is possible to buy a life insurance policy for someone else. Generally, most people are shopping for insurance on themselves: they are intending to be both the policyowner and the life insured. But, that’s not always the case; sometimes you as the buyer and proposed owner of a policy may need to purchase a policy for someone like a loved one or a business partner.
That said, you can’t just choose someone you see on the sidewalk and purchase them life insurance. There are stipulations around insurable interest and consent. Read on to find out why and how you might buy life insurance for someone other than yourself.
How life insurance typically works
Life insurance is an agreement between you and a life insurance company, where if you die, they will pay a death benefit: a lump sum of tax-free money to someone you choose. In exchange, you agree to periodically pay them an insurance premium: a small amount of money over time.
How buying life insurance for someone other than yourself works
When you purchase life insurance for yourself, it’s usually because you envision someone needing your income should anything unfortunate happen to you, but the opposite can also be true. There can be people in your life, that should they die, would not only be a sad situation, but also represent a financial burden for yourself, your extended family, or your business.
In these situations, it is possible to take out a life insurance policy on someone other than yourself, as long as you can prove insurable interest and inform them of the life insurance policy you are taking out on them.
What is insurable interest?
Insurable interest is the technical term insurance companies use to describe your vested financial interest in the life of another person you seek to insure. Basically, to arrange insurance on the life of another person, you must prove that the insured person’s death would financially burden you. An insurance contract that you purchased on the life of a third person would not be considered legally valid unless there was a financial loss to you from the death of the insured. Insurable interest is the thin line that distinguishes an insurance contract from a wager.
In some cases like spouses, life-partners, parents, and minor children, insurable interest is considered obvious and you will not need to provide further evidence. With friends and business partners, however, insurance companies may scrutinize the situation more diligently and ask for further evidence of any shared finances or financial agreements.
Who can I buy life insurance on?
In addition to being able to buy life insurance on yourself, you may also choose to insure any of the following:
- Your spouse or partner
- Your child or a child of your spouse or partner
- Your grandchild or a grandchild of your spouse or partner
- Your parents or grandparents
- Your business partner or employees
- Anyone you have an insurable interest in
Why do I need to inform the person I am covering with a life insurance policy?
To cover an individual other than yourself with a life insurance policy, you require their explicit written consent. This is for several reasons. For starters, they need to sign the policy application so you can submit it to the insurance company. As well, there is more than likely medical underwriting, which could entail in-person medical exams or a medical questionnaire they would have to complete.
Minor children are exempt from the consent and signature requirements of life insurance application.
Reasons to buy someone else a life insurance policy
As we mentioned above, there are several situations where you are financially dependent on someone else and face financial hardship should something happen to them. Below are some of the reasons why buying someone else a life insurance policy makes sense.
Can I buy life insurance on my spouse or partner?
Covering a spouse is one of the most common reasons for buying a life insurance policy for someone other than oneself. If both you and your spouse or partner work, you may rely on your dual income to manage your financial obligations such as mortgage payments, raising children, higher education costs, paying down debt, and more.
But if you are the sole breadwinner, there are also reasons to buy a life insurance policy for your partner. Having a financial cushion should something happen to them can allow you to take time off, fund counselling services for yourself or your children, or generally help with any expenses that may accompany their unfortunate passing (funeral expenses, settling their estate, etc).
Can I buy life insurance on my former spouse or partner?
Yes, you can as long as you have insurable interest. If you have children together and share custody, then you may rely on your former spouse’s financial support in raising them. As well, some divorce agreements stipulate that ex-spouses must provide a life insurance policy as part of spousal support.
Can I buy life insurance on my parents?
Yes, if you are in any way still financially dependent on your parents, either through co-signed loans or business interests, you can consider buying them a life insurance policy to cover those. You can also consider purchasing a smaller permanent insurance policy for your parents to cover funeral and other end-of-life expenses.
Can I buy life insurance on my child?
Yes, you can buy life insurance on your children. And, as mentioned above, you don’t need the explicit consent of minor children to purchase them a life insurance policy.
In fact, many parents consider buying children’s insurance; you may choose a whole life insurance policy purchased for a child early in life. It provides coverage in the short term should anything happen to your child, to cover funeral expenses, and to support time off work. That said, you hopefully never utilize the death benefit, and instead lock in your child’s future insurability and provide them with an investment option through the policy. They can choose to keep the permanent coverage, or use the policy’s cash value to fund a big purchase like a car, house downpayment, or higher education.
For the same reasons you may consider coverage for your parents, you can choose to cover adult children as well if you share or have cosigned a debt, or rely on them for your financial well-being.
Can I buy life insurance on my business partner(s)?
While an insurance company will perform its due diligence in proving insurable interest, it is possible to buy life insurance for a business partner. In many cases, a business partner can be essential and integral in your company’s success. Covering them in case of an unexpected passing can ensure you keep your business afloat or obtain control of the business in what should be a tumultuous time while you reconfigure operations.
Providers such as Manulife offer policies like Business Term to cover specific business-related insurance situations like this.
Alternatives to buying life insurance for someone else
If you are not prepared to purchase a life insurance policy for another individual, there are alternatives. Life insurance riders like a child term rider or parent protection rider can provide coverage in the event of the passing away of these people in your life, though coverage is typically limited to the $20,000 – $30,000 range. In the case of child riders, you also obtain the option to lock in future insurability for your children once they are no longer minors.
Another simple alternative is speaking with the individual you plan on insuring and suggesting they take out their own coverage and name you or someone else (children, parents, other business partners) as the beneficiary.
How do I apply for life insurance on someone else?
As we mentioned at first, your initial step will be to determine your insurable interest in this person, and to inform them of your coverage plans. This can seem daunting, but by reaching out to a licensed insurance broker from PolicyAdvisor, we can quickly help you figure out your insurable interest and create the best insurance plan for that situation.
The information and views provided herein is for general informational purposes only and should not be considered legal or financial advice.
- Purchasing life insurance for someone else requires insurable interest
- Anyone who you cover with a life insurance policy other than yourself needs to be aware of the arrangement and provide their written consent
- In some cases, you may be able to instead add a life insurance rider to your own policy to cover someone else