An insurance policy protects things that would cause you a financial loss if they were destroyed, lost, damaged, or otherwise no longer available. This is called an insurable interest, and it’s an important topic for all types of insurance.
For example, you likely have homeowners’ or renters’ insurance because you would suffer a significant financial setback if your home and personal belongings were destroyed.
Insurable interest also refers to the financial benefit you receive from something continuing to work or exist. It’s pretty clear to see how this works for items large and small. After all, you’d obviously take a financial hit if your home or car was suddenly destroyed.
However, the insurable interest rule doesn’t just apply to things you can own. It also applies to people. In fact, to buy a life insurance policy on someone other than yourself, you need to prove you have an insurable interest in that person. In other words, you can only own a life insurance policy on someone whose death would cause you financial hardship, and that individual must give consent to you owning the policy on their life.
You might not think about this rule when you’re buying a life insurance policy on yourself because you would be the owner and the insured, but it’s very important when you’re trying to take out a life insurance policy on someone else. You’ll need to make sure you have a qualifying insurable interest in anyone you hold a life insurance policy on.
For more about what that means and what qualifies as insurable interest, keep reading as we will explain everything on the topic in this article.
Basics of Life Insurance and Insurable Interest
There can be up to four parties involved in a life insurance policy:
- The policy owner is the person who owns the life insurance policy. They are the only one that is allowed to make any changes to the policy.
- The insured is the person whose life the insurance policy is protecting on. If the insured person dies during the policy’s life, the beneficiary will receive the death benefit.
- The beneficiary or beneficiaries is the individual, individuals, or entity that would receive the death benefit of the life insurance policy if the insured dies.
- The payor is the individual responsible for making sure premium payments are paid.
Except for the beneficiary, in most cases, the policy owner, insured, and the payor are all the same person. However, it is possible to take out a policy on someone else. That’s where the insurable interest comes into play.
You’re always considered to have an insurable interest in your own life. That’s why insurable interest isn’t something you need to worry about when taking out your own policy.
On the other hand, it’s not as clear-cut when you’re buying life insurance for someone else and making yourself the owner. In that case, you’ll need to prove to the insurance company that an insurable interest exists between you and the insured.
Plus, when you take out a life insurance policy, the beneficiary you choose to name on your life insurance policy will also need to have an insurable interest connection, meaning that your death would have a financial impact on the beneficiary in some qualifying way.
Proving An Insurable Interest
It is illegal to take out a policy on someone else without their knowledge or consent. Proving an insurable interest makes purchasing a life insurance policy on someone else legitimate and prevents insurance fraud.
Proving an insurable interest will take place during the application process. When filling out an application for coverage, both the insured and the owner will be required to provide identifying information such as name, address, birthplace, and social security, to name a few.
Again, the owner section would only need to be completed if the insured was not owning their own life insurance. If the insured and owner are not the same, then the intended policy owner will complete the owner section of the application.
The owner section located on the life insurance application will require the same identity confirming question as to the insured, but most importantly, it will ask what the relationship to the proposed insured is? The underwriter assigned to the application will pay close attention to the response to this question to determine if the relationship between you and the insured party qualifies.
Depending on the response to the relationship, the underwriter may require additional information if the relationship appears questionable. If there is no qualifying insurable interest, the insurance company will deny issuing the life insurance policy. If it is found that insurable interest does exist, a policy will be issued, providing all other underwriting requirements have been met.
What Information Is Needed When Applying For Life Insurance On Someone Else?
There are times when it makes sense to take out a life insurance policy on someone else. It’s completely legal and accepted to do this, as long as you can prove insurable interest and have consent from the proposed insured.
Even though you’ll be the policy owner, you’ll need the insured party’s corporation to take out a policy on them. They’ll need to give explicit permission and need to provide their signature on the application, and any final forms should coverage be approved.
The proposed insureds participation will also be needed for the application process itself. After all, their health, lifestyle, and other factors will be the ones being evaluated. The final premiums you pay will be based on the insured party, not on the policyholder.
You’ll need information from them about:
- Their health
- Their family health history
- Their job
- Their hobbies
You might already know some of this information, but verifying with the insured party is very important. The more accurate your life insurance application is, the more accurate your quotes will be. You don’t want to leave out a crucial piece of information that could lead to higher rates or even denial.
The insured and medical exam requirements
Depending on the insurance company, the type of life insurance coverage being applied for, and the applicant’s age, there may be a chance that the insured will require a medical exam as part of the application process.
Again, it is their health and not the health of the policy owner that matters.
The medical exam will be a standard life insurance health exam provided by the life insurance company and conducted by a licensed examiner. A life insurance medical exam will generally consist of health questions, height and weight check, blood pressure readings, a blood draw, and a urine sample.
Like any other life insurance application, the exam results will play the largest part in determining eligibility for coverage and an assigned rate classification if approved.
Who Is Eligible To Buy Life Insurance on Someone Else?
So, who can claim insurable interest on someone else? As mentioned above, you’re always considered to have an insurable interest in your life. When you’re both the policy owner and the insured party, you’ll be responsible for naming a beneficiary.
Remember, the beneficiary you choose must also have an insurable interest in your policy. Although they will have no ownership in your life insurance policy, they will be the ones to receive the death benefit if you were to pass.
The insurance company will review who you name as your beneficiary and ask for the relationship between you and your beneficiary on the life insurance application. It is important that when choosing a qualifying beneficiary, that individual will need to be financially impacted by your death to qualify.
You cannot purchase a life insurance policy to provide someone with an intentional financial gain. The insurance company will look for anything that doesn’t make financial sense, especially to protect against any possibility of fraud. If a beneficiary appears questionable, the underwriter will request details about the relationship and how your death would financially impact the beneficiary you name.
When it comes to policies that have an owner different from the insured, some rules also need to be followed. There are only a few sets of people who are qualified to claim insurable interest on another person.
The first set of eligible people are family members. However, not all family members will qualify. You generally can’t take out a life insurance policy on your third cousin unless there are some extraordinary circumstances.
Members of your family who are normally allowed to take out insurance policy are immediate family members that include:
- Your spouse
- Your children
- Your parents
- Your grandparents
- Your siblings
Family members aren’t the only people who can take out a policy. Business relationships between partners and even key employees can create the need for life insurance to be purchased and owned by the company. In these certain circumstances, insurable interest would exist.
Remember, the rule is that the insured party’s death would cause you a significant financial loss. So, if your finances are tied into someone else’s through business, insurable interest will often exist.
You can also prove insurable interest when you’ve co-signed a loan with someone. For example, say you co-signed your adult child’s student loans. If they were to die, you would be on the hook for any remaining loan payments. It’s not a bad idea to protect your finances and take out a life insurance policy on someone in this situation.
You can check out more information about common scenarios of a strong insurable interest in taking out a policy on someone else listed below.
Married couples often own their own policy and name each other as beneficiaries of their life insurance policies. However, in some cases, one spouse may choose to take ownership of their own policy and their spouse’s policy.
This is often common when there is one spouse that generally handles all the household bills. It allows the spouse who is the owner of both policies to have the flexibility to contact the life insurance company to handle any issues rather than having the other spouse present.
It is also not uncommon for spouses to be the owner of each other’s life insurance policies. Setting up ownership in this matter provides each spouse with peace of mind knowing that they each control each other’s life insurance policy.
Remember, only the life insurance policy owner can make changes to the life insurance contract. They are also the only party entitled to information on the contract. Not even the insured can receive information on the contract if they are not the owner.
Parents and grandparents can take out a life insurance policy on their own child or grandchild and meet insurable interest guidelines. Children don’t generally earn an income, but medical and funeral expenses would occur if there were to pass away unexpectedly.
Those costs, and hopefully would never occur, are likely to be passed on to the guardian of the child. This financial obligation creates an insurable interest, and because children are minors, they are unable to own their own life insurance policy.
Children’s life insurance plans are a very popular form of life insurance coverage. The child is never involved in the process at all, and everything is handled by the parent or grandparent owning the life insurance policy.
Most child life insurance plans are limited to a maximum of $50,000 with the option to increase coverage when they have reached the age of an adult. The life insurance policy owner generally has the option to remain the owner of the policy permanently or, if they choose, transfer ownership to the child when they are no longer considered a minor and anytime thereafter.
Owning a life insurance policy on your sibling is a gray area. You can’t always claim an insurable interest in your sibling. As a rule, if your finances aren’t somehow tied, it’s unlikely you’ll be able to convince an insurance company that you need a policy on your sibling.
However, some common exceptions would make sense to name a sibling as a beneficiary of your life insurance policy or vice versa. For example, you might have insurable interest if you and your sibling are in any of these situations:
- You both share financial responsibilities
- You’re both in business together
- You’re both managing the care for an elderly parent together
So, as an example, let’s say that both you and your sibling take care of your elderly father with Alzheimer’s disease. If your brother were to die suddenly, your father would still need care.
This would leave you with the full financial stress of either moving your father into your home or finding other care arrangements. In this situation, you and your brother have an insurable interest in your brother’s life.
The only other time where you might get away with being the actual owner of a sibling’s life insurance policy is if you are taking care of a sibling with a medical condition. If you were to purchase a plan such as a guaranteed issue policy and were going to be responsible for handling funeral arrangements and final expenses, your insurable interest would not be in question at all.
However, if you are trying to take out a life insurance policy on a healthy sibling who is financially stable, the insurance company is likely to not allow you to be the owner of their policy. If there is a financial connection between you and your sibling, it will be recommended that your sibling takes ownership of their own policy and name you as the beneficiary assuming that their death would impact you financially.
When you go into business with a partner, you’re often tying your finances together. After all, both of you are likely putting time, money, and effort into making your business a success.
If your business partner were to die suddenly, it could cause serious financial trouble for your business. That creates insurable interest and is one of the main reasons why partners purchase a life insurance policy on each other.
The death benefit can create funds needed to purchase the deceased partner’s shares in the company (know as a buy/sell agreement) or create the funds needed to continue operating the business, pay employees and even cover loan repayments.
Partnerships are not the only form of business life insurance where the owner and insured are two different persons. Key-employee life insurance is when a business purchases a life insurance policy on an employee who possesses a particular set of skills that could cripple the company if that employee suddenly passed away.
The business would have a qualifying insurable interest in the employee. As long as the employee has given their consent, the business could purchase life insurance on the employee and be both the owner and the policy’s beneficiary.
If the employee passed, the death benefit would be paid out to the business and be used to locate and hire another employee that could fill the role of the deceased employee.
When You Can't Claim Insurable Interest On Someone Else
It’s generally difficult to take out policies on people such as friends, girlfriends, boyfriends, neighbors, etc. Even when naming any of these individuals as a beneficiary, it can be difficult.
That’s not to say it’s impossible to claim an insurable interest in these situations, but you’ll likely need to submit strong proof to the insurable company to verify your claim of owning their life insurance policy.
Even family can have a hard time proving insurable interest. While there are always expectations, you’ll have a tougher time claiming insurable interest on your:
- Your aunts and uncles
- Your nieces and nephews
- Your stepchildren
- Your step-parents
Again, there are expectations. For example, let’s say your niece lives with you and provides child care to your young children. If she were to die, you’d have no care arrangements for your children while you were at work.
This could create insurable interest in your niece. Remember that as a rule, insurable interest only exists if your finances would somehow be affected if the insured party were to die.
Claiming insurable interest on ex-spouses
It makes sense that your finances are almost always tied to your spouse, creating insurable interest. However, it might not be as clear regarding ex-spouses or co-parents. So it might surprise you that having a policy on ex-spouse or co-parent is pretty standard. It’s often part of divorce proceedings and known as “court-ordered life insurance.”
The primary reason for this is to protect alimony or child support payments. These are payments you’re legally obligated to make to your former partner.
Without these payments, your former partner would likely suffer financial hardships and have trouble caring for any children you share. That creates insurable interest, and it’s why it’s often required that ex-spouses and co-parents have life insurance policies on each other.
Even if it’s not legally required, taking out a life insurance policy on a co-parent is not a bad idea. If they were to die, childcare would change dramatically in ways that could cause severe financial stress. That’s often enough to prove insurable interest.
Remember that you need permission to take out an insurance policy on someone else. So, if you’re considering taking out a policy on a former partner, you must have a conversation with them first.
What Is Stranger Owned Life Insurance?
A stranger-owned life insurance policy is an illegal policy on someone on whom the policyholder doesn’t have an insurable interest to the insured.
This type of life insurance is always a fraud that generally targets senior citizens. A third party will take out an insurance policy on a senior they have no insurable interest in. The scammers will offer the insured parties upfront cash to consent to the policies.
Seniors might think they’re getting a good deal and not realize this is always a fraud. The third parties choose seniors who are healthy enough that they’re likely to outlive the contestability period, but not the entire length of their policy.
Outliving the contestability period reduces the chance of an investigation and increases the chance the fraudulent third party will receive the death benefit.
This practice has such a long history that the United States Supreme Court declared it illegal all the way back in 1881. Unfortunately, that hasn’t completely ended stranger-owned life insurance policies.
The practice continues to this day. Thankfully, modern data registers and public information make it easier for insurance companies to spot fraud. Most insurance companies are diligent about checking for this type of fraud and denying any stranger-owned policies.
Frequently Asked Questions About Insurable Interest
Insurable interest can be hard to figure out, so it’s understandable if you still have questions. We’ve answered some common and advanced questions below. If we missed answering your question, please be sure to let us know so we can get you an answer right away.
Can an entity such as a trust own a life insurance policy?
A trust is a legal entity and can be an owner of a life insurance policy, named a beneficiary, or both as long as the trust has an insurable interest to the insured. If creating a trust-owned life insurance policy, the trustee will be responsible for handling all owner signatures.
Trust-owned life insurance policies will require supporting documents outlining the details of the trust. The majority of life insurance applications involving a trust, regardless of being listed as an owner or beneficiary, will often have a supplemental application form, and you may be required to provide a copy of the actual trust documents if the insurance company finds it necessary.
Can my fiance or fiancee purchase a life insurance policy on me?
As with any situation involving insurable interest, it will depend on the circumstances. When it comes to an engaged couple wanting to own life insurance policies on each other, the insurance company may require you to own your own policy until you are officially married.
That doesn’t mean you should hold off on purchasing life insurance until you are married. You should purchase the life insurance coverage now and, once married, complete a service form known as a transfer of ownership, which allows you to transfer ownership of your policy.
If you want to own your own policy but are curious to know if you can name your fiance or fiancee as a beneficiary, this is generally acceptable by most life insurance companies.
Do I need permission from my own children?
Your insurable interest in your children comes from the costs that fall to you if they were to die, including medical and funeral costs. As a parent or legal guardian, you generally don’t need to submit any proof of this to an insurance company. You also don’t need permission from any child considered a minor when taking out a life insurance policy.
However, the rules are different when it comes to teenagers. Although you’ll still have an insurable interest, sometimes certain states require that teenagers give explicit permission. An insurance agent or financial planner can help you figure out the exact rules in your state.
You’ll need permission in all states once your child is 18. This applies even if your child still lives with you and is still financially dependent on you. Anyone over 18 needs to give their permission to be an insured party, including your children. In fact, many policies taken out on children will automatically switch ownership to the insured child once they turn 18.
Can I own a life insurance policy on my parents?
Certain circumstances will allow for an adult child to own a life insurance policy on their elderly parents. Your insurable interest in owning a life insurance policy on your parents would need to prove that their death would cause you financial hardship. This could mean that their medical bills would fall to you, that you would inherit their debt, or that their death in some other way would financially impact you.
If you are the child and are looking into buying a policy on your parents, the insurance company will likely question why the parent is not the owner of their own policy. This is especially true if they are financially independent. Instead, they may require the parent to be the owner of their own policy and request that you are the beneficiary.
However, if you’re looking into buying your parent a small burial insurance policy to help cover funeral and other small final expenses and your parents are on a fixed income, you, as the policy owner, should not be an issue.
Do I always need permission from the insured party?
Yes. There are no exceptions to this rule. You can’t legally take out a policy on someone else without their permission. This is true even if you have a clear-cut insurable interest.
You’ll always need the other person to give their consent and sign off on the policy. Plus, you’ll need them to answer medical questions and take a medical exam in many cases. Even if you apply for a no medical exam policy on someone else, you’ll need their corporation and their permission.
Why would I need to be the policy owner and not simply the beneficiary?
The beneficiary of a life insurance policy is the person who receives the death benefit payout. For most financial situations, this makes sense and would be the preferred option.
Beneficiaries are generally people who are dependent on the insured party’s income in some way. With the life insurance payout, they can continue meeting their financial obligations even if the insured party were to die.
A beneficiary has no control over the policy. In fact, their only involvement with it is receiving the death benefit money. A policy owner, on the other hand, controls the policy. They make the payments and can make changes to the policy if needed.
This is important in some situations, and it’s why taking out a policy on someone else can be a good idea in some circumstances.
Most of the time, especially if the insured is healthy and financially capable of owning their own life insurance policy, the life insurance company will often like to see the insured be the owner of their own life insurance policy and naming a beneficiary that the insureds death would financially impact.
Can I change ownership of a life insurance policy after it has been issued?
Ownership of a life insurance policy can be changed after it has been issued and placed in force. Every life insurance company has its own set of rules on when a change to the policy can occur.
Most companies will require that the life insurance coverage has been in force for at least one full year before a transfer of ownership is requested. Changing ownership will require a policy service form to be completed and signed by the current insured and the new owner.
How do I figure out if I have an insurable interest in someone?
A life insurance agent can help you if you’re unsure whether your situation creates insurable interest. They can advise you in complex situations where it might not be clear if insurable interest exists.
You need to have a qualifying insurable interest and permission to take out a policy on another adult. To prove insurable interest, you’ll need to prove that you’d suffer a financial loss from the insured party’s death. The insurance company will investigate your claim of insurable interest, especially if the situation isn’t clear-cut.
In many cases, the insured party will need to take a medical exam. However, you can also take out a no exam policy on another person. No exam policies allow you to get coverage without an exam. This might be easier on the insured party. Plus, it often speeds up the process. You’ll still need to meet all the other requirements.
At No Medical Exam Quotes, we can match you with the best no exam policies for your situation. If you’re ready to get started, you can fill out our quick form to get quotes from top companies today.
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