Buying life insurance on someone else and naming yourself as the beneficiary may seem like a plot point in a film noir mystery. But buying a policy from someone else makes sense in some situations.
However, whether you can do it depends on your relationship and the other person’s consent.
The basic rules
“What the insurance company is looking for is what’s called insurable interest,” says Marvin Feldman, president and CEO of Life Happens, a nonprofit organization funded by insurance companies. insurance and brokerage houses. “There has to be a real relationship where there will be a loss when the person dies, whether it’s emotional loss or financial loss.”
For example, you can take out a life insurance policy on a family member, romantic partner or business partner. But you cannot buy a life insurance policy on a casual acquaintance or a stranger.
And you can’t secretly buy a life insurance policy on someone else – at least not without committing a fake and risking jail time.
The person whose life is insured must sign the application, authorizing the insurance company to collect data, such as motor vehicle records, prescription drug records, and information submitted on previous health insurance claims. and life. And often the person has to undergo a life insurance medical examination as part of the application process.
Why you might want to do it
The main reason for buying the policy, rather than letting the other person buy it and name you as the beneficiary, is to be in control.
The buyer, who is the contract holder:
Receives statements and is responsible for paying monthly or annual premiums.
Can take out loans against the police or buy it back for cash if it is whole life insurance or another type of permanent cash value policy.
If you are only the beneficiary or the insured, and not the policy owner, you have no authority or control.
When to do it
Consider holding a policy on someone else if:
Alimony or alimony is owed to you. Courts often order ex-spouses who owe alimony or child support to have life insurance on their own life and to name their exes or a children’s trust as beneficiaries. But an angry support payor might be tempted to change beneficiaries or stop paying for the policy.
“Lawyers will tell you that there is a legal remedy for this…. You can sue people for redress, ”says Chris Chen, Certified Financial Planner at Insight Financial Strategists in Boston and Treasurer of the Association for Divorce Financial Planners. “This, of course, is expensive, time consuming and the only benefit is for the lawyers. A better strategy, he says, is for the beneficiary to buy the policy and for the divorce agreement to record the cost of the life insurance when alimony or child support is set.
You have co-signed a loan. The lender will come after you if the borrower dies. If repayment of the loan proves difficult, consider purchasing life insurance on the borrower and naming yourself as the beneficiary. One exception is federal student loans, which are canceled if the borrower dies. The cancellation of private student loans on the death of the borrower is up to the lender.
You are business partners. Life insurance can be an important tool in financing a buy-sell agreement, a kind of marriage contract that explains how the business is transferred to the other partner in the event of death, disability or resignation. . Business partners buy life insurance on top of each other and designate themselves as beneficiaries. In the event of death, the surviving partner can use the life insurance payment to buy out the deceased partner’s share of the business. Without this life insurance money, there might not be enough money and the surviving partner could end up in business with their spouse or children.
Owning the policy is a must if you want to control, whether it’s to make sure that premium payments are made on time or that the right beneficiary is named.