Can You Take Out Life Insurance For Someone Else

Contrary to what you might see in film and television, life insurance providers will not let you take out a policy on someone without their permission. However, it is entirely possible to take out a life insurance policy on a loved one or colleague with their knowledge and consent, provided you have an insurable interest in them—meaning you would suffer a financial loss if they were to pass away. This is often the case for spouses, children, and even business partners.

In this guide, we’ll explain what you can expect from the process, when it might be a good decision, and the common types of relationships in which someone may choose to take out a life insurance policy on the other.

In this article:

• Can I Take Out a Life Insurance Policy For Someone Else
• Designating a Beneficiary
• Understanding Policy Ownership and Premium Payments
  • Methods for Setting Up a Life Insurance Policy for Someone Else
• How to Purchase Life Insurance for Someone Else in Four Steps
  • Step 1: Obtaining Permission
  • Step 2: Determining Insurance Needs
  • Step 3: Choose the Right Policy
  • Step 4: Submitting Application
• Who Can You Take Out Life Insurance On
• Case Study Example
• Frequently Asked Questions (FAQs) About Taking Out Life Insurance for Someone Else

Can I Take Out a Life Insurance Policy For Someone Else

Yes, there are many situations where taking life insurance out for someone else can be beneficial. However, it’s important to make sure the other person is willing to go through the process with you. If the other person is unwilling or unable to consent to you obtaining a life insurance policy in their name, or you don’t stand to lose anything if they were to pass, you will not legally be able to get a policy on their behalf. This, of course, protects the other person but can be unfortunate in certain cases where the other party may be unable to consent due to disability, medical conditions, or other circumstances.

Designating a Beneficiary

When taking out a life insurance policy for someone else, it’s important to know that the policyowner will have ultimate say over the policy. They will be the one choosing the beneficiary, and can designate whoever they choose. The beneficiary might be yourself, your children, an employee of the policyholder, etc. as long as the beneficiary stands to face financial loss in the event the policyholder passes away.

Typically policyowners are able to change the designated beneficiary of the policy at any time. However, there is also a choice for them to name an irrevocable beneficiary, who is guaranteed to receive the death benefit upon the policyholder’s death and cannot be removed from the policy without their permission. This option can be beneficial as it makes it difficult for the beneficiary to be changed even after death, meaning no one can alter or challenge the policy to try and benefit from it instead of the beneficiary such as a step-parent, spouse, etc. When assigning an irrevocable beneficiary, policyholders can also choose a contingent beneficiary, someone who would receive the death benefit in the case the irrevocable beneficiary were to pass before the policyholder.

Understanding Policy Ownership and Premium Payments

The situation is the same as choosing a beneficiary: the policyholder will be the one making decisions for the policy. You can give advice and make suggestions, but the person listed as the policyholder has ultimate authority over the policy and can make policy changes, cancel the policy, change the beneficiary, transfer policy ownership, borrow against the policy cash value, and so on.

Typically, this also means the policyholder is the one responsible for making payments for the policy. While it’s possible for someone else to pay the policy premiums, it’s typically inadvisable since the premiums will not be reimbursed upon the death of the policyholder. If the payor is not the policyholder, companies will also require a third-party identification form to be compliant with anti-money laundering laws as well. 

That being said, certain situations may benefit from someone else paying policy premiums. For example, in the case of a policyowner status being given to a retired parent, the child may choose to pay the life insurance premiums to ensure the policy doesn’t lapse if the policyholder is unable to pay.

The following are three common methods seen when setting up life insurance for someone else.

Method 1: Someone Else is the Policyholder and Insured and You Are the Beneficiary

This method is the common case for traditional insurance, where the policyholder is the one insured and paying the premiums and chooses a beneficiary who would receive the death benefit if they were to pass. In this case, you would suggest the person gets a life insurance policy with you as the beneficiary and can help them with the application process or do it on their behalf with their written consent and proof of insurable interest.

For example, you are unable to earn an income due to disability and rely on your parent financially so you suggest a life insurance policy where you will be listed as the beneficiary, and your parent is the policyowner and insured. Your parent would fill out the application on their own, or you could do it on their behalf but would need their written consent and state your insurable interest in their life.

Method 2: You Pay the Premiums on Behalf of the Policyholder

For this method, someone else (a parent, spouse, friend) would be the policyholder, meaning they have control of the policy. The person insured and the beneficiary would also be someone else. Your role would be paying the life insurance premiums which would also require a third-party identification form to be compliant with anti-money laundering laws as well. 

For example, an elderly parent is the policyholder but since they are retired and can’t pay the premiums themself, their child pays the premiums instead. The person insured in this policy is the grandparent, and upon their passing, their listed beneficiary would receive the death benefit which could be used to cover funeral costs or estate taxes.

Method 3: You Are the Policyholder and Beneficiary While the Insured is Someone Else

This is the case for specific types of policies such as corporate life insurance (COLI) policies or child life insurance policies. COLI policies are a great option for businesses interested in ensuring key executives and employees. In this case the business would own the policy, pay the premiums, and benefit if the insured staff member were to pass away. This can cover the cost of hiring and training a replacement and keep operations running smoothly.

Child life insurance is structured similarly with the parent being the policyholder, paying the premiums, and being listed as the beneficiary of the policy. The benefit of this type of policy is the cash value amount that grows tax-deferred as your child grows and the offer of guaranteed insurability for children, even if they were to develop a medical condition.

How to Purchase Life Insurance for Someone Else

If you are interested in purchasing life insurance for another person, there is a process that you will need to follow to ensure everything is set up without issue. This includes, obtaining permission, determining insurance needs, choosing the right policy, and submitting the application.

Step 1: Obtaining Permission

While telling someone you would like to take a life insurance policy in their name can be an awkward conversation topic, it is the very first thing you should do before starting the application process. If you are both on the same page and agree that a life insurance policy is a financially advisable option, then you will need their written or verbal consent that they are aware you are getting the policy in their name. Once you are both on the same page and permission has been received you can move on to the next step.

Step 2: Determining Insurance Needs

The next thing you will need to do is determine the insurable need of the beneficiary. This can be done by considering what financial loss the beneficiary would face if the policyholder were to pass. The most common reason to get life insurance is to cover end-of-life costs such as funeral and memorial services, shared debt such as a mortgage, replacing income, future obligations such as child education costs, or to take over shared expenses such as medical costs for aging parents.

Step 3: Choosing the Right Policy

Once you understand your insurance needs, you will need to choose the right policy for your situation. Different policy types include term life insurance which will offer coverage for a specified term typically ranging from 5-20 years, permanent life insurance which provides lifelong coverage and the potential for a cash value investment, and no medical life insurance which will not require the policy holder to undergo a medical exam.

Here is a quick overview of the different type of life insurance policies and their benefits:

Step 4: Submitting the Application

Once you have permission from the policyholder, understand your coverage needs, and know which policy type is right for you, the next step is to go through the application process. What this entails is having the policyholder fill out, or help you fill out, the application including information such as their health history, occupation, age, any medical conditions, etc. The individual will also need to undergo a medical exam and fill out a medical questionnaire, unless you decide to get no medical life insurance, in which case it wouldn’t be required. Once you have filled out the application with all the necessary information, you can submit it and wait to hear back from the insurance company.

Need help filling out an application?

If you need help with an insurance application or more information on getting life insurance for someone else, please feel free to reach out to one of our expert financial advisors. We’d be more than happy to walk you through everything you need to know and explain what options are available to you.

Who Can You Take Out Life Insurance For

The following are examples of common types of relationship where one person may have an insurable interest in the other. This means it may be beneficial to discuss taking out a life insurance policy in these scenarios.

Here is a quick overview of the type of relationships that may benefit from life insurance:

Case Study Example

Jenna is a 35-year-old woman who is considering taking out a life insurance policy on her sibling, Rachel, where Jenna would be the beneficiary and Rachel would be the policyholder. The reason being that if Rachel were to pass away, Jenna would be legally responsible for caring for her sister’s children and covering her end-of-life costs. This being the case, Jenna discusses the situation with her sister who agrees life insurance may be a good option.

Here is what Jenna and Rachel consider when determining coverage:

• Jenna estimates the amount she will need to raise Rachel’s children, including education and daily living expenses, would amount to $200,000.
• Rachel’s children will likely be financially dependent on a caregiver for the next 20 years.
• Jenna anticipates the end-of-life costs for Rachel, including funeral expenses would be around $10,000.
• Rachel also decides that leaving $20,000 to each of her two children would help keep them financially secure.

With these considerations in mind, Jenna and Rachel determine that $250,000 of life insurance coverage would be enough. Jenna also ensures that Rachel agrees to the policy and understands the reasons behind it. Rachel signs the necessary consent forms. Jenna then gathers documentation that demonstrates her legal responsibility for Rachel’s children in the event of Rachel’s death. This includes any legal guardianship agreements and court documents.

Given that Rachel is in good health and has no significant pre-existing conditions, they determine the best option is a 20-year term life insurance policy with $250,000 in coverage that would be paid out to Jenna if Rachel were to pass away. They work with a broker to compare and find the best policy option for them and are quickly approved after submitting all the required documents.

Frequently Asked Questions (FAQs) About Taking Out Life Insurance For Someone Else

Find a solution that’s right for you.

Taking out a life insurance policy for someone else can be complicated but it doesn’t have to be! Speaking to a life insurance expert can help you learn more about your options and fully understand what the life insurance process will look like for you and your family. At Protect Your Wealth, we work with and compare policies and quotes from the best life insurance companies in Canada to ensure we find the best solution for you and your needs.

Schedule a free consultation to talk about your life insurance goals by contacting us or calling us at 1-877-654-6119 to talk to an insurance expert today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia, Manitoba, and Alberta including areas such as Kingston, Oakville, Grande Prairie, and Victoria.