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Buying life insurance on someone else and naming yourself as the beneficiary might sound like the plot of a film noir mystery. But taking out a policy on another person is completely legal, and sometimes it can make good financial sense.
Whether you can do it, though, depends on your relationship with the insured, and you’ll need their consent.
Buying life insurance on someone else: The rules
In order to buy a policy on someone else, the life insurance beneficiary (the person who receives the payout) must have an "insurable interest" in the person covered by the policy. This means the beneficiary must experience a loss when the insured person dies, whether that’s emotional or financial.
For example, you can buy a life insurance policy on a family member, romantic partner or business partner. But you can’t buy a life insurance policy on a mere acquaintance or stranger.
And you can’t secretly buy a life insurance policy on someone else.
The person whose life is insured must sign the application, giving permission for the insurance company to collect data, such as their medical history and hobbies. And, the person may have to undergo a life insurance medical exam as part of the application process. So it’s next to impossible to purchase coverage without the insured person’s involvement.
» MORE: Compare life insurance quotes
The benefits of buying coverage on someone else
The main reason to buy the coverage yourself, rather than let the other person purchase it and name you as beneficiary, is to have control over how the policy is managed.
The buyer, or policyowner:
Receives the statements and is responsible for paying the premiums.
Has the authority to name or change the beneficiary on the policy.
Examples of when to buy coverage on another person
Here are a few scenarios where buying life insurance on another person can be beneficial.
You want to manage your parents’ coverage as they age. Whether you rely on your parents financially or need additional funds to pay for final expenses, you can buy life insurance for your parents to help cover costs when they die. As the owner, you pay for and manage the coverage so they don’t have to.
You co-signed a loan. If you are the co-signer on someone else’s loan, you’ll likely be responsible for the remainder of the debt if the borrower dies. Consider buying life insurance on the borrower and naming yourself as beneficiary if repaying the loan by yourself would be a hardship.
You have business partners. Life insurance can be an important tool for funding a buy-sell agreement. This is when business partners buy life insurance on each other and name themselves as beneficiaries. If one dies, the surviving partner can use the life insurance payout to buy out the late partner’s share of the business.