When you think of who would be likely to purchase life insurance, you might think of a parent taking out a policy to benefit their child, or a spouse doing so for his or her partner. But can you get life insurance on anyone, regardless of your relationship to them?
HOW LIFE INSURANCE WORKS
Before we get too far, since we’re talking about “getting insurance” it’s probably a good idea to define what that means by explaining a bit more about how life insurance works. With any life insurance policy there are three key stakeholders (often two of the three are the same person):
The owner/payer: For all intents and purposes, think of this as the person who is “getting the policy” and who will pay for it over time. In nearly all cases, this person will also be one of the next two people involved in the same policy.
The insured: This is the person you’d refer to as who life insurance is “on.” It’s the life that’s insured. If this person dies while the policy is in force, the beneficiary will get the death benefit.
The beneficiary(ies): This is the person (or people) that will get the death benefit if the insured dies while the policy is in effect.
If you’re talking about getting life insurance on someone, you’re probably talking about a situation in which you are the owner and beneficiary of the policy. The “someone” is the insured.
So can you get life insurance on anyone? The short answer is no. In order to be the owner or beneficiary of a policy on someone else, you must have an insurable interest on that person.
WHAT IS INSURABLE INTEREST?
Having insurable interest on someone simply means that in the event of the insured person’s death, the beneficiary of the life insurance policy could suffer financially. So in order to get life insurance on someone, you would need to prove that you have an insurable interest on the life of the person that you are insuring, meaning that their death would impact you or your family financially.
If you support someone financially and your passing would lead to financial hardship for them, then they would have insurable interest on you. And if you’re being supported financially by someone, then you have an insurable interest on them. But there are other examples as well.
EXAMPLES OF INSURABLE INTEREST
While you won’t have insurable interest on every single person in your life, there are quite a few relationships that fit the bill, both personally and professionally.
YOU HAVE AN INSURABLE INTEREST ON YOUR SPOUSE OR PARTNER.
When you’re married or in a committed relationship, your financial lives are intertwined. This means you have an insurable interest on each other and probably need some amount of life insurance on each other.
Remember that your financial relationship doesn’t end simply because your marriage does. If you are paying alimony, spousal support or child support to a former partner, they may have insurable interest in your life.
YOU HAVE AN INSURABLE INTEREST ON YOUR CHILDREN.
Parents or grandparents often get life insurance because they want to ensure their children or grandchildren will be taken care of if something was to happen to them. In this case, the child or grandchild would be the beneficiary.
Or, should something happen to their child, insurable interest comes into play here because parents could suffer financially should they need to pay for unexpected medical bills, funeral costs and other final expenses.
And in the case of adult children who support their parents in some capacity, (particularly later in life when their parents may not be working and are living off of Social Security benefits and minimal retirement savings), it can be argued that the untimely death of the adult child could lead to a degraded quality of life for the parents. Note that the definition of aging adults is not limited to parents — grandparents, siblings, aunts and uncles, etc., may claim insurable interest for the same reason.
RELATED CONTENT: Our Life Insurance Guide can help you learn more about life insurance and how it can benefit your financial plan.
A BUSINESS PARTNER OR LENDER
If you own a business with another person, you likely have insurable interest on each other. Should something happen to either of you, the business could be significantly disrupted, especially if your business is self-funded. Life insurance can also come into play when building a business succession plan.
It’s also possible for a lender to take out a life insurance policy on a borrower. The lender could lose the money should the borrower die before the loan is paid back.
IF YOU CO-SIGN A LOAN FOR SOMEONE (OR THEY CO-SIGN FOR YOU)
The death of a borrower or co-signer can result in the entire balance of a loan being due immediately. For this reason, it’s typically a good idea to ensure that you have life insurance on anyone that’s named with you on a loan if you won’t have another way to pay the balance of the loan should either of you pass away unexpectedly.
These are some of the most common reasons that an insurable interest exists. But this certainly isn’t an exhaustive list. If you’re considering purchasing life insurance for yourself or someone else, a financial advisor can help you understand whether or not insurable interest exists and help you find the best type of policy for your needs.