Buying life insurance on another person may sound like the plot to yet another Coen Brothers dark comedy, but it is an honest issue.
Can you buy life insurance on someone else?
The simple answer is that, yes, you can purchase insurance against the loss of another person’s life.
The Big Question
Obviously, the question gives rise to issues of perverse incentives. Stories abound, for example, of investment funds buying up life insurance policies. There’s even an urban myth version from the 1980s pertaining to the AIDS epidemic at the time, a story that satisfyingly ends with the investors getting their comeuppance when the health world managed to get a handle on the disease. The human imagination is prone to thinking the worst, especially on subjects such as the financial benefit of another person’s death.
Set aside the ghoulishness, the urban myths and the bad Hollywood plots. The fact is that life insurance is a legitimate hedge against the loss of a person’s life. You may depend on a person you love for your financial survival. You may have a business partner who is so essential to your operations that that person’s death would be your financial ruin. No one wants to think about why they need life insurance. But, that does not make the need any less pressing. You have to disambiguate how you feel about the issue of buying life insurance on another person from the basic, pragmatic need to hedge against the unpredictable future.
Key man Insurance
In a large firm, it is possible for the company to take life insurance out on any “key individual” who may be considered vital to the long-term good of the company. This includes individuals such as the CEO or the CFO. In fact, in any case involving any individual whose loss may cost the company significant money, the company is able to acquire life insurance.
This has bearing on a concept called “insurable interest.” Insurable interest is any valid reason to acquire life insurance for a person. Insurable interest extends to any person whose departure would create financial difficulty for you. The big requirement is that the individual being insured against signs off on the contract. This is meant to protect against the possibility of foul play. But, again, it is worth noting that those scenarios fall more under the heading of “fevered imagination” than “viable scam.” And, of course, the individual being insured against would be subject to a health examination. So, it’s unlikely the object of an insurance policy would be caught unaware.
The big takeaway to remember is that life insurance is a very important hedge against the unpredictability of the world. The problem of unpredictability extends beyond your own fate. It extends to the fate of those you love and those you depend upon to secure your financial future. Seeking life insurance for someone else can protect you and your financial interests. You don’t wait for the worst to happen. You plan for a secure financial future, no matter what happens. That’s what seeking life insurance, for yourself and for others, is all about.