Lauren Lewthwaite Last Updated On: August 4, 2023

Home / Blog / Life Insurance / Can You Take a Life Insurance Policy Out on Anyone?

How to Buy Life Insurance on Someone Else

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Taking out life insurance on someone else might feel a little icky. In fact, in the old days, you could take out life insurance on anyone you wanted, from your neighbor to your boss. Obviously, this creates some ethical considerations, which is why the rules have changed.

But that doesn’t mean you can’t take out life insurance on someone else. You can, with a few key stipulations. We’re going to take you through the ins and outs of this complex question, because it’s important that you understand what it means to take out life insurance on someone else and how it works. 

Life insurance matters, for both the insured and the policyholder, and those two aren’t always the same. Let’s explore it. 

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Back to Basics: How Life Insurance Works

Let’s take a step back and quickly review how life insurance works, as this will help us answer the question. Life insurance is designed to protect loved ones from financial struggle should the insured pass away. The death benefit, the payout that the beneficiaries receive, is there to help pay for end-of-life costs, like a funeral, burial/cremation, final medical bills, or for ongoing expenses like the mortgage, childcare, and lost income. 

There are different types of life insurance, but the premise for them all is pretty much the same: to avoid a strained financial situation if someone were to pass away. In any insurance policy, there are three aspects:

  • The insured, meaning the person whose life is insured by the policy. If they pass away, that would trigger the payout. 
  • The policyholder, who is more often than not the insured as well. The policyholder is the one who makes payments on the policy and can change/cancel it. 
  • The beneficiaries, or the people who receive the payout should the insured person pass away. This is usually a spouse or family, but it can also be organizations, estates, and trusts.

When the insured person passes away, the insurance provider will pay out the death benefit (usually a lump sum) to the beneficiaries listed on the policy. So, who can those beneficiaries be? Let’s explore that next.

Life Insurance Beneficiaries

The fact of the matter is that you can’t take out an insurance policy on just anyone. You wouldn’t be able to take out a policy against your favorite celebrity or an aged neighbor down the road. 

Here are some of the people you can take out an insurance policy on:

  • Child
  • Parent
  • Business partner
  • Spouse (former or current)
  • Life partner
  • Grandparent
  • Sibling

You’ll notice a common theme: almost all possible beneficiaries are family, except business partners. To take out a life insurance policy on someone, you have to be able to prove that their passing would have a negative financial impact on your life. 

This would be the case for all examples listed above; you might rely on a parent or grandparent for financial support, your spouse or partner helps you pay the mortgage, your business partner helps you support your shared business, and you might not be able to work if you were grieving the loss of a child. 

You might also consider the costs of paying for the funeral, burial/cremation, and outstanding medical bills of the deceased, which could financially impact you. You can find out more info here on funeral costs to give you an idea. 

You can’t take out an insurance policy on a friend or coworker for these same reasons. You wouldn’t be financially impacted by their death, so you can’t insure yourself against that possibility. 

Here’s the kicker: the person you’re insuring also has to consent to the insurance policy being taken out on them. But that’s not the only stipulation. There’s also a test you have to pass, and no it’s not a pop quiz. More details next. 

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Passing the Insurable Interest Test

One of the main reasons you can’t take out insurance on just anyone is the ethics: you can’t gamble on the life of others, and it creates a financial incentive for them to pass away. This is why you have to be able to show that there’s a financial relationship between you and the insured, and that their passing would have an adverse impact on you financially.

This is called the insurable interest test, and it’s a way for insurance companies to make sure you have a financial stake in the life of the person you’re insuring. Otherwise, it wouldn’t make financial sense for insurance providers to underwrite policies for people taking out insurance policies on just about anyone.

When Should You Take Out Life Insurance for Someone Else?

Taking out life insurance on someone else isn’t a bad thing. In fact, there are plenty of scenarios where it’s a prudent, smart decision. Here are some common situations where you might want to take out life insurance on someone else:
  • You are raising children with a spouse or partner
  • You have mortgage with someone
  • You have a business together
  • You want to guarantee future coverage for your child (you lock in low rates now when they’re young and healthy and avoid them being declined due to pre-existing health conditions later in life)
  • You’re a co-signer on a large loan for someone 
  • You would be responsible for someone’s debts and outstanding bills should they pass away
These are just some examples of why you would want to insure someone’s life. Again, as long as you have a relationship with that person and a financial stake in their life, there’s nothing wrong with taking out an insurance policy on someone else. 

How to Take Out Life Insurance on Someone Else

If any of the above situations sound like you and you want to protect yourself from financial strain, then let’s get into the how of taking out life insurance on someone else.    The good news is, it’s fairly straightforward. Here are the steps you would take:
  • Choose a life insurance policy type, such as term life insurance, whole life insurance, funeral/burial insurance, etc. 
    • For many, term life insurance is a good fit because it protects you for a set term, such as 10-30 years. This might be while the mortgage is being paid off, the kids are young, or during your prime earning years. 
    • Funeral/burial insurance, also known as final expense insurance, is a low cost option to ensure all end-of-life costs are taken care of. 
    • Whole life insurance lasts someone’s entire life, no matter when they pass away. This might be a good option if you depend on someone financially and want to be guaranteed a payout.
  • Shop for quotes. This is one of the most important steps, because it helps ensure you find the best bang for your buck.
    • Get at least two to three quotes to compare coverage and cost.
    • You can get started by clicking here for access to quotes.
  • Get consent from the person you’re insuring. In theory, this should come well before the first step, but now is when you prove consent to the insurance provider. The insured will need to sign a consent form and they may have to undergo a medical exam, depending on the type of life insurance.
  • Show insurable interest. Consent from the insured isn’t enough; you also have to prove insurable interest, meaning that you have a financial stake in someone’s life. Family relationships are fairly easy to prove, but in the cases of business partners and a life partner, you may need more documentation to prove the relationship exists and that there is an insurable interest.
After this last step, you’re ready to sign on the dotted line. Remember, as the policyholder, you’re responsible for keeping up with premium payments. If you start to miss payments, the insurance provider can revoke the policy. But as the policyholder, you can also make changes to the policy if needed.  Life insurance is an important part of a good financial plan. But it’s not the whole plan. Go ahead and get our free retirement planning handbook to help guide you through the ins and outs of retirement, because it’s never too soon to plan for the future. 

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Key Takeaways: Should You Buy Life Insurance for Someone Else?

While it might seem odd, there are plenty of valid reasons to take out life insurance on someone else. An unexpected death is challenging enough, without trying to juggle the grieving process with sudden financial strain. 

A life insurance policy on someone else gives you the peace of mind you need to make big life decisions, like taking out a mortgage with someone, having kids together, or sharing a business. And as the policyholder, you’re in full control of the insurance policy, which gives you even more peace of mind. 

So, there’s absolutely nothing wrong with taking out life insurance on someone else—as long as you can prove insurable interest and get their consent. These last two points are crucial, because otherwise you could be committing insurance fraud (and no one wants that!). 

If taking out life insurance on someone else is the right decision for you, then all that’s left is getting quotes and choosing a policy. We’re ready to help with access to free quotes fast right here, so that you can get the ball rolling as quickly as possible. 

When it matters, we’ve got you covered. 

Lauren Lewthwaite Lauren Lewthwaite has been freelance writing for almost five years writing content that ranges from health to insurance and everything in between. Lauren is also a trained translator in French and English and is a dog-mom to an adorable Australian Shepherd.

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