Can You Take Out Life Insurance on Someone Else?

Is buying life insurance on another person allowed -- or a good idea? 

Life insurance policies pay out a death benefit when someone passes away. Usually, a consumer buys a life insurance policy that covers their own life. This would mean that an individual purchases coverage and becomes the policyholder, paying premiums so a death benefit will be paid to provide their family members with financial security if they pass on. 

But, is it possible to buy a policy that insures someone else's life? Here's what consumers need to know about whether that's allowed and when it is a good idea.

When is it permissible to buy a life insurance policy that pays out when someone else dies?

An individual is allowed to buy a life insurance policy that covers someone else's life. However, there are certain conditions that must be met first. Specifically:

• The person buying the policy must have an "insurable interest" in the life of the person who the policy covers. That means the individual who is buying the policy would need to experience some financial harm if the insured person passed away. 
• The person whose life is insured must give consent. It's not possible to secretly buy insurance coverage that pays out a death benefit on someone else's life. The person whose life is being insured must agree, and usually must go through the underwriting process. That would mean they would need to provide their medical details and potentially even undergo an exam arranged by the insurer. 

If these two criteria are met, and a person is willing and able to pay premiums to insure someone else, there's no obstacle to getting a policy. 

Is it a good idea to buy a life insurance policy on someone else?

Buying a life insurance policy on someone else makes sense if a person would be financially damaged by the death of someone who either cannot afford life insurance or who won't buy it. 

For example, if there is a married couple and the husband works but the wife doesn't, the husband may want to buy a policy on his wife if she can't afford to pay the premiums herself. The husband would be financially damaged if his wife passed and no longer provided care for the children or household, so he'd have an interest in insuring his wife. Since he would be paying the premiums, he might want to own the policy. 

If two people own a business together, one partner may also want to buy life insurance on the other. See, when either partner dies, they can leave their share of the business to family members. But the surviving partner may not want to work with the deceased partner's family, so they may want to use the death benefit to buy out their interest. 

These are just a few examples of circumstances where buying life insurance on another person might make sense. Ultimately, if it is important to receive a payout after someone passes, purchasing a policy to cover that individual's life could be a smart financial choice.