Requirements for Taking a Life Insurance Policy Out on Someone Else

Before you can take out a life insurance policy on someone else, you must understand the principle of "insurable interest." Life insurance companies allow you to purchase life insurance on the life of individuals whom you have a financial interest in only. The insurer and many states, require that you are able to demonstrate this insurable interest prior to taking out a life insurance policy on someone other than yourself.

Benefits

The benefits of taking out a life insurance policy on someone else is that you are able to insure the life of someone whom you care about. You also may be able to buy out your business partner when he dies. This would ensure the smooth continual operation of the business. You have full control over the policy during the individual's lifetime. This means that any cash values are yours and can be used by you for any purpose.

Drawbacks

By taking out a life insurance policy on someone else, you must pay additional premiums that reflect the other person's health. If the person you are insuring is older than you and whose health is not as good as yours, for example, this means you'll be paying premiums that are higher than what you would be paying for the same coverage.

Significance

The significance of these insurable interest requirements is that the life insurance company is not insuring people as an investment. In other words, you are not able to buy life insurance on a stranger and profit off of her death.

Misconceptions

A common misconception is that you are allowed to purchase life insurance on yourself only. While this is the most popular way to buy life insurance, it is not the only way. For example, life insurance can be purchased on your spouse, your child, your business partner or your parents.

Warning

Don't try to misrepresent the truth to the insurance company. Even if you are able to circumvent the insurable interest requirement imposed by your state and the insurance company initially, the contract still will be considered void from the date of issue. States require that an insurable interest exists between you and the insured individual as a matter of law. Insurance companies actively monitor this and will refuse to pay a death claim if the contract is found to be void.