Normally, people take out a life insurance policy on themselves to make sure that they provide for loved ones, or at least to cover burial costs or final expenses. Getting a life insurance policy is one way of showing we care by planning financially to protect the people we love the most even after our death. But can you buy life insurance on someone else? The key ingredient will be whether or not there is an “insurable interest”, i.e. is there a quantifiable financial loss to you if the insured dies?
Take a moment to consider who you count on for financial provision. What if that person in your life who provides for you and your family dies? If he or she doesn’t have life insurance already, then you might face some serious financial problems down the road. But don’t despair, there’s still something you can do.
How to Buy Life Insurance on Someone Else
Stranger Originated Life Insurance (STOLI)
Now you just can’t take out a life insurance policy on anyone because companies want there to be an “insurable interest.” Stranger owned life insurance revolve around three parties: the insured, the carrier, and the lender.
The first party is the insured who takes out the policy or uses a trust and funds the trust with the policy. The second party is the life insurance carrier who enters into a contract with the insured. The third party is the lender who pays the premiums, often times through a loan to the insured. After a certain period of time, the policy is sold to the third party lender in return for a payment to the first party insured.
Stranger oriented life insurance is illegal in the United States.
To get life insurance on another person, you need to prove that you rely on that person for financial provision, known as an “insurable interest.” If you can prove there is an insurable interest, then it is possible to buy life insurance on someone else to protect that interest. For example, if you are worried about what may happen to you and your family financially in the event of another person’s death, then you are probably eligible to take out a life insurance policy on that person.
Insurable interest means that you have vested interest in someone’s life. Should that person die, you will face financial loss, usually because a regular revenue stream is cut off. This may take the form of child support or alimony in a divorce settlement with an ex-spouse. You can also take out a life insurance policy on someone else such as a spouse, companion, business partner, or even your father or mother, who financially contributes to your life.
Can I Get life insurance on a relative?
Many people seek out life insurance for elderly family members. Sometimes it makes sense to get life insurance on someone else, such as a brother or sister. However, you do not have an insurable interest on every relative—again, an insurable interest exists only with those who have financial involvement in your life. Your Great Aunt Edna, who hasn’t written you a check since your 17th birthday, isn’t eligible. Neither is your neighbor, your barber, or a stranger.
Why do I have to prove insurable interest?
Insurance is designed to protect something you already have or that you would have had; it’s not just for personal gain. You can’t take out life insurance policies against random people who you think may die, and then get a lump sum or recurring payment because you did so. In purchasing a life insurance policy, you have to be protecting assets or payments.
How do I get life insurance on another person?
You need insurable interest, but you also need consent of the other person. You must inform the person who you are getting a life insurance policy on, and that person must agree. In most cases, the insured person will have to undergo a life insurance medical exam as well, although no exam life insurance is available.
And if you just need to cover burial costs, check out our article on the top burial and final expense insurance companies.
Avoid Stranger Owned Life Insurance (STOLI)
It is almost impossible to get a life insurance policy for someone else without them knowing about it. Most companies will ask that the person being insured sign consent forms. Not to mention that most policies require a medical exam from the proposed insured.
The main reason a company wants to make sure there is an insurable interest is because the company wants to avoid stranger owned life insurance. There are a lot of inherent dangers associated with stranger owned life insurance, most obviously that a stranger has a vested interest in the death of the insured. The stranger will reap a financial benefit if the insured dies, and the sooner the insured dies, the sooner the stranger gets a serious payday. It’s not hard to see how this can lead down a nefarious path.
Typical victims of STOLI scams are the elderly, which is why it is so important to understand the small print on burial insurance policies for seniors.
There are documented cases of people recruiting elderly clients. The stranger applies for life insurance on the elderly person’s behalf. The stranger pays the elderly person money as compensation and recoups his or her cost, plus substantial profits when the elderly person dies. Obviously, this practice is massively frowned upon, and laws have been enacted over the last few years to prevent stranger owned life insurance. Source.
Will the person insured be financially liable for the life insurance policy?
When you buy life insurance on someone else you are considered the owner of the policy and you are the one responsible for paying the premiums. If you stop paying on the life insurance policy, the policy will lapse.
Which life insurance company is best for buying life insurance on someone else?
Life insurance coverage is a very personal thing. There is no way to recommend one life insurance company for all situations. When you get insurance on another person, the company that’s best for that situation may not even be the company you use for your personal coverage.
To figure out which life insurance company is best, you must consider specific information about the insured. Information such as his or her:
- Habits (drug/tobacco/alcohol/eating)
- Weight and BMI
- Medical history
- Medical conditions
Only after an industry expert carefully considers these variables can you know which life insurance company is the best one for the person you want to insure. Most agents work for or exclusively represent one life insurance company (think State Farm). That means, despite having a lot of knowledge about the industry, they have a vested interest in pushing their business and their life insurance products.
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