Buying life insurance on someone else and naming yourself as beneficiary might sound like a plot point in a film noir mystery. But taking out a policy on another person makes good sense in some situations.
Whether you can do it, though, depends on your relationship and having the other person’s consent.
The ground rules
“What the insurance company looks for is what’s known as insurable interest,” says Marvin Feldman, president and CEO of Life Happens, a nonprofit funded by insurance companies and brokerages. “There has to be a true relationship where there’s going to be a loss when the person dies, whether that’s an emotional loss or a financial loss.”
You can buy a life insurance policy on a family member, romantic partner or business partner, for instance. 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 — at least not without committing forgery and risking jail time.
The person whose life is insured must sign the application, giving permission for the insurance company to collect data, such as motor vehicle records, prescription drug records and information submitted on previous health and life insurance applications. And, often, the person has to undergo a life insurance medical exam as part of the application process.
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Why you may want to do it
The main reason to buy the policy, rather than let the other person purchase it and name you as beneficiary, is to have control.
The buyer, who is the policy owner:
- Receives the statements and is responsible for paying the monthly or annual premiums
- Has the authority to name or change the beneficiary — the person who gets the money when the insured dies
- Can take out loans against the policy or surrender it for cash if it’s a whole-life or other permanent policy with cash value
If you’re only the beneficiary or the insured — and not the policy owner — you don’t have any authority or control.
When to do it
Consider owning a policy on someone else if:
You’re owed alimony or child support: Courts often order ex-spouses who owe alimony or child support to have life insurance on their own lives and name their exes or a trust to benefit the kids as beneficiaries. But an angry alimony payer might be tempted to change the beneficiary or stop paying for the policy.
“Lawyers will tell you that there is legal remedy for that …. You can take people to court for redress,” says Chris Chen, a certified financial planner with Insight Financial Strategists in Boston and treasurer of the Association for Divorce Financial Planners. “That, of course, is expensive, time-consuming, and the only benefit is to the lawyers.” A better strategy, he says, is for the beneficiary to buy the policy and for the divorce agreement to account for the cost of life insurance when the alimony or child support payments are set.
You co-signed a loan: The lender will come after you if the borrower dies. If repaying the loan would be a hardship, then consider buying life insurance on the borrower and naming yourself as beneficiary. An exception is federal student loans, which are discharged if the borrower dies. Whether private student loans are forgiven when the borrower dies depends on the lender.
You’re business partners: Life insurance can be an important tool for funding a buy-sell agreement, a sort of prenup that spells out how the business transfers to the other partner if one dies, becomes disabled or quits. 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. Without that life insurance money, there might not be enough cash, and the surviving partner could wind up in business with the partner’s spouse or kids.
Owning the policy is a must if you want control, whether that’s to ensure the premium payments are made on time or the right beneficiary is named.