Purchasing a life insurance policy on somebody else and naming yourself as a beneficiary seems like it would be a plot to a very intriguing murder mystery. The bad guy plots the devious death of some millionaire in order to reap a huge financial windfall from an insurance payout.
While it might seem fishy, you actually can purchase a life insurance policy on someone else’s life, and believe it or not, in some instances, it actually makes good sense. However, in order to buy coverage for someone else and name yourself a beneficiary, there are certain rules that apply.
If you’re thinking about buying a life insurance policy for someone else for your benefit, keep on reading to learn more.
How It Works
In order for someone to purchase a life insurance policy for someone else, there has to be “insurance interest”. In other words, you have to have a real relationship with the person you are buying coverage for, and in that relationship, you would have to suffer serious financial loss if the insured passes away.
The point of a life insurance policy is to provide financial protection when someone that you are financially dependent on passes away. When the insured passes away, the beneficiary of the policy will receive a payout from the company that carries the deceased’s life insurance policy in the form of a death benefit. In other words, “insurable interest” means that you, the named beneficiary of a policy, would have to be negatively impacted monetarily is the person that the policy covers dies. In other words, there has to be some real relationship between you and the individual you are buying a policy for.
For instance, you might be able to purchase a policy for a parent that you are financially dependent on, but you won’t be able to buy coverage for someone you have on relationship with or that you don’t rely on financially; your garbage man or your boss, for example.
Why Insurable Interest Matters
Unfortunately, the plot of a fictional murder mystery film can happen in real life. There are people in the world that have bad intent and would actually purchase a life insurance policy, naming themselves the beneficiary, in a plot to off someone and receive the death benefit that the policy offers. With that said, if it were legal to buy coverage for just anyone, well, serious issues could arise.
To avoid travesties, insurance companies cannot legally sell life insurance policies on other parties if defined insurable interest does not exist. In other words, insurable interest matters because it ensures that the death of an insured individual does not create unethical financial gain for a beneficiary.
You Have to Have the Consent of the Insured
In addition to establishing insurable interest, in order to purchase a life insurance policy on somebody else’s life, you have to have the consent of that individual. You can’t secretly purchase a policy for someone else; you have to have the party’s permission.
So, if you’re buying a policy for your mother, she would have to offer her consent to the life insurance company. Additionally, she would likely be required to have a medical examination.
Consent is just another way to ensure that there aren’t any bad intentions; in other words, you aren’t buying a policy with the intent of reaping a financial windfall if the insured passes away.
Who Can You Buy a Life Insurance Policy For?
As long as insurable interest can be proven and you have the party’s consent, you can purchase life insurance on virtually anyone; including your boss. Some of the most common individuals that other people buy life insurance coverage for include:
- Significant others
- Business relations, such as a business partner
- Roommates that share financial obligations
Anyone that you depend on financially you can purchase a life insurance policy for, as long as insurable interest exists, and the individual has provided his or her consent (not to be redundant).
How Much Coverage can you Purchase for Someone Else?
Insurable interest has to be proven, and if it is, the amount of interest you have in the person you are purchasing coverage for also has to be determined. The amount of interest you have in the party you are buying a life insurance policy for will determine the amount of coverage you can buy for him or her.
The amount of coverage you can purchase has to make sense. The amount of coverage you are purchasing cannot be higher than the financial loss you will experience if he or she passes away.
Summing It Up
As long as you can prove insurable interest, have consent, and the amount of coverage you are buying makes sense, you can purchase a life insurance policy for someone else. Speak to a reputable insurance agent to find out how you can get started.