Buying life insurance on someone else can be a difficult decision, but it is important to consider the financial security of loved ones in the event of a tragic loss. Whether it is a spouse, child, or aging parent, purchasing life insurance on another person can provide peace of mind and financial stability for those left behind.
This article will discuss the different types of life insurance policies available when buying a life insurance policy on someone else, the process of purchasing the policy, and the importance of communication with the insured individual. It is important to understand the options and responsibilities when making this important decision for the well-being of those you love.
Buying life insurance on someone else
There are a variety of reasons why someone may choose to buy life insurance on someone else. For example, a parent may want to ensure that their child is financially protected in the event of their death, or a business owner may want to ensure that the business can continue to operate smoothly in the event of the loss of a key employee. Additionally, a spouse may want to ensure that their partner’s family is taken care of financially in the event of their death.
Truth be told, there is probably an infinite number of reasons why someone might want to purchase a life insurance policy on someone else. Yet despite all of these different reasons, each one must have one thing in common before an insurance company will allow one individual to purchase a life insurance policy on another. And that one thing is called, an “insurable interest”.
Insurable interest refers to a legally recognized financial interest in the continued life of an individual. This interest can be established by a person’s relationship to the insured, such as a spouse, parent, or child, or by a financial contract or agreement, such as a business partnership or loan. In order for a life insurance policy to be valid, the policyholder must have an insurable interest in the life of the insured person at the time the policy is purchased. Without an insurable interest, the policy may be considered void and any death benefits will not be paid out.
Or in other words, in order for someone to take out an insurance policy on someone else, they need to demonstrate how they would be financially injured as a result of the insured’s premature death.
Examples of insurable interest:
There are several examples of situations where someone may have an insurable interest on another person. These include:
- Business partners: If two or more people own a business together, they may want to purchase a life insurance policy on the other partners to protect the business in the event of one partner’s death.
- Spouses and domestic partners: A spouse or domestic partner may purchase a life insurance policy on their partner to provide financial support for themselves and their children in the event of their partner’s death.
- Parents and children: A parent may purchase a life insurance policy on their child to provide for their child’s future, especially if the child is dependent on the parent for financial support.
- Employers and employees: An employer may purchase a life insurance policy on key employees to protect the business in case of the employee’s death.
- Financial dependents: An individual may have an insurable interest on someone they financially depend on, such as an elderly parent or grandparent.
It’s important to note that in order to purchase a life insurance policy on someone else, the person buying the policy must have an insurable interest on the insured. This means that they must have a financial stake in the insured’s well-being, and their own well-being would be affected by the insured’s death.
How much insurance can you purchase on another person?
general, the amount of coverage that can be purchased on someone else will be based on the insurable interest that the purchaser has in the insured person. This means that the insurance company will typically only allow coverage to be purchased for an amount that is reasonable and necessary for the financial protection of the purchaser.
Factors such as the insured person’s income, assets, and debts will also be considered when determining the amount of coverage that can be purchased. It is important to note that some states may have laws that limit the amount of life insurance that can be purchased on another person. It is always best to check with the insurance company and consult with a financial advisor to determine the maximum amount of coverage that can be purchased in your specific situation.
Additionally, the amount of life insurance that can be purchased on another may be dictated by the type of life insurance policy being considered.
Types of Life Insurance Policies one can purchase on another
There are several types of life insurance policies that someone can purchase on another person. One of the most common types is a term life insurance policy. This type of policy provides coverage for a specific period of time, usually 10, 20 or 30 years. The death benefit is paid out if the insured person passes away during the term of the policy. This type of policy is typically the most affordable option, but it does not build cash value and the coverage ends when the term expires.
Another type of life insurance policy that someone can purchase on another person is a permanent life insurance policy. This type of policy provides coverage for the entire life of the insured person and typically has higher premiums than term life insurance. However, permanent life insurance policies also build cash value over time, which can be used to pay premiums or borrowed against. There are several types of permanent life insurance policies available, such as whole life, universal life, and indexed universal life.
Another type of life insurance policy that someone can purchase on another person is a burial life insurance policy. Burial life insurance policies are generally offered in one of two forms, a simplified issue burial life insurance policy or a guaranteed issue life insurance policy, and are designed to help cover one’s final expense costs.
These types of life insurance policies typically require less underwriting than traditional policies and usually won’t require a medical exam. They also usually have lower death benefits and higher premiums than traditional policies. Guaranteed-issue life insurance policies will also require a policyholder to wait 2-3 years before the policy will cover natural causes of death.
How to Purchase Life Insurance on Someone Else
When purchasing a life insurance policy on someone else, it is important to first establish that you have an insurable interest in that person. The second step is to make sure that you have the “consent” of that person to allow you to purchase a life insurance policy on him or her.
Consent refers to the agreement or permission given by an individual for another person to take out a life insurance policy on them. This can include a verbal or written agreement and is typically required for a policy to be valid.
After one has established an insurable interest and consent from the insured, the next step should be to determine how much coverage you will need and for how long. This will help you determine whether a term life insurance policy or a whole life insurance policy is best. With this information in hand, you can then begin shopping for coverage.
Shopping for Life Insurance
When applying for life insurance on someone else, the first step is to shop around for rates. This can be done by contacting multiple insurance companies and requesting quotes. It’s important to compare the coverage and costs of each policy before making a decision.
Next, the person applying for the policy will need to provide personal and financial information about the person being insured, known as the insured. This may include their name, birth date, and health history. The applicant will also need to provide their own personal and financial information.
The insurance company will then review the information provided and may require additional information or a medical examination for the insured. Once the application is approved, the policy will be issued and the applicant will need to pay the first premium.
Does the insured have to take a medical exam?
Whether or not a medical exam is required to qualify for life insurance can vary depending on the type of policy and the insurance company. Some policies, such as a simplified issue term or whole life insurance policy will forgo a medical exam in lieu of a series of health-related questions. In some cases, this may benefit an insured because it will simplify the approval process with little or no effect on the price they might have to pay for the insurance.
That said, however, simplified issue life insurance policies can be more difficult to qualify for if you have been diagnosed with a pre-existing medical condition because the insurance underwriter will have less information to base his or her decision on. In cases like these, an applicant may benefit by taking a medical exam.
In situations like these, it’s always best to work with an experienced life insurance agent who will have a better “gauge” on which type of life insurance policy (a fully underwritten or a simplified issue) would work best.
Potential Pitfalls one might encounter
Potential pitfalls when purchasing a life insurance policy on someone else include:
- Not having an insurable interest in the person you are purchasing the policy for, which can lead to your application being denied.
- Not being able to obtain the proper consent from the insured person, will prevent you from being able to purchase a life insurance policy on him or her.
- Not disclosing relevant information on the application, which can lead to the policy being denied or not providing the coverage you thought it would
- Not considering the long-term financial implications of the policy and whether it is affordable for you to maintain the premium payments over time.
Now while it may seem like buying life insurance on another person is tricky, truth be told, it’s actually a very common practice and can be done for a variety of reasons, such as protecting a family member or business partner.
That said, however, what one must always keep in mind is that the concept of insurable interest is crucial, as it ensures that the person buying the policy has a financial stake in the insured person’s well-being.
Beyond that, the types of life insurance policies that can be purchased on another person, including term life, universal life, and whole life are pretty much the same as they would be for purchasing a life insurance policy on oneself and the application process for buying life insurance on someone else is similar as well. Especially when you choose to work with an agent like those here at IBUSA who have plenty of experience helping individuals just like you!