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People sometimes think of life insurance as something to buy for yourself to help protect loved ones after you die. But can you use insurance to help protect yourself if someone else dies? Understanding life insurance and who you can take out policies on could help you plan for the future. Can you take out a life insurance policy on anyone? Depending on the circumstances, you might have options that could benefit you, your loved ones or even your business.
Who Can You Take Out Life Insurance On?
A traditional use of life insurance is to help protect a family against financial hardship after the loss of a parent, whether the parent earns income or not. However, life insurance could be useful in a variety of other situations. The underlying concept is the same: If someone dies, survivors are likely to experience financial challenges and other complications. Money from a life insurance death benefit can help survivors reduce the financial impact.
While people traditionally purchase a policy for themselves or a spouse to help benefit their immediate family, you can also purchase a life insurance policy on other people. Can you take out a life insurance policy on anyone you see on the street? No, but you might be able to buy life insurance on people who affect you and your loved ones.
What Is Insurable Interest & How Does It Work?
Insurance companies need to verify that you have an "insurable interest" in someone you're buying life insurance for. Put another way, you need to show that you would encounter some sort of loss if the insured person dies. For example, if your spouse dies, that person's income goes away, or it may be harder to handle household duties such as caring for children (and everything else that goes on in a household). As a result, you would endure a loss — both emotional and financial — when your spouse passes away.
If a child dies, you may experience a financial loss, as you likely have to pay for final expenses, as well as medical bills or other related costs. The same goes for a parent. You may need help covering outstanding debts, medical expenses, burial costs or other financial responsibilities that may fall to you after they die. If you're receiving — or expecting to receive — financial support from a parent, their death could also affect your finances. In fact, the death of a parent might leave you responsible for supporting other family members (a surviving parent, siblings or others), so a life insurance policy could help.
What if the death of someone outside your family could affect you financially? If you can show a legitimate loss would result from someone else's death, you might be able to buy a policy on them.
Business partners are one common example. If you're in business with someone, their ongoing contributions of time and energy (and possibly money) are likely linked to your success. If your partner dies, are you able to fill their shoes? You might not have the time, skills or resources to do what they do — that's why you're in a partnership. In such a situation, you may have an insurable interest on your business partner, so it may be possible to buy life insurance on their life.
What Happens When You Purchase Life Insurance on Someone Else?
When you take out a life insurance policy on someone, the insurance company needs to review the insured person's health history and other details. To complete that task, the individual being insured will need to answer some basic questions and may need to undergo a medical exam. The proposed insured will need to sign the application to confirm the health history provided and to consent to insurance coverage on his or her life. So, while you can likely purchase life insurance on anybody you have an insurable interest in, you also need their participation to purchase the policy.
The Bottom Line
Life insurance can provide a valuable financial cushion when someone dies. It's easy to understand how families might use life insurance to help protect against financial difficulties when a parent dies, but there may be other situations where insuring others provides benefits, such as family members or business partners. If there's a chance you could face financial hardship after the death of someone, such as a family member or business partner, you may want to consider exploring the different types of life insurance. For more information, consider speaking with a financial representative.