We know you can take out life insurance for yourself, but what about purchasing a policy for someone else? After all, it's meant to provide financial protection for family and/or loved ones in the event of your passing, so it may seem like a logical option. We'll look into whether it's possible to buy cover for another party, and what is needed to do so.
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Can you take a life insurance policy out on anyone?
You can buy life insurance for someone else, so long as you have an 'insurable interest in that person'. This means that you would suffer financially if the person were to pass away.
Typically, it includes immediate family members, such as a spouse or child, but could also include business partners or other individuals with whom you have a financial relationship.
What is insurable interest?
Put simply, insurable interest is when you would be financially impacted by the death of the person being insured. This could include loss of income, financial support, or other monetary benefits that you receive from them.
For example, you might want to insure someone if:
They owed you money that would be lost if they passed away
You are financially dependent on them for support
You have a financial interest in their business or partnership
Without an insurable interest, there is a risk of insurance fraud and policies taken out for malicious purposes.
Who can you take life insurance out on?
With most insurers, you can only take out a joint life insurance policy - where two people are covered under one policy. Usually someone who is your spouse or domestic partner. In this case, both parties would need to agree to the cover and provide consent for the policy.
Yourself
The main and most straightforward way to take out a life insurance policy. You take out the policy, which covers you in the event of death. You have all the control, choosing the cover amount, beneficiaries, and policy type. For most, this is usually whole or term life insurance.
With whole life insurance, you take out the policy with the intention of it lasting for the rest of your life. As long as you continue to pay your premiums, it will last right up until your death, paying out a fixed lump sum.
Term life insurance is a different kettle of fish. You agree to a cover length (known as the policy term) for a specified amount of time, which is usually between 5-50 years. If you die within the policy term, the policy will pay out a cash lump sum. If you outlive the term, the policy will expire and no amount will be paid out.
This might be a suitable option if you are the primary earner in your household, where others depend on your income for financial support. Or if you want to cover a mortgage, then decreasing term life insurance could be a good option.
Spouse or partner
If you and your partner share finances, then the sudden death of one of you could have a significant impact on the other's situation. A popular option is joint life insurance - which we've already discussed. Instead of just one of you owning cover, it applies to both of you.
There are two options for joint cover - first death and second death, both being self-explanatory.
As you might have guessed, first death pays out after the first death in the couple. It pays out a one-time lump sum to the other party. Once this happens, the policy ceases.
Second death pays out after both policyholders have passed away. This means the money could go to children, guardians, or other beneficiaries as chosen.
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Parent
You can't buy a policy on behalf of your parents without a proven insurable interest.
Even as an adult, you could still be dependent on your parents' support.
For example, you may share a home with your parent/s which could be at risk of being sold if they were to pass away and you couldn't afford the mortgage payments on your own. As the cost would be incurred by the parents, they would need to be repaid to the children.
Another example is where the parent and child are involved in a business, where the parent's death would cause financial issues for the company.
In Scotland, there is a maintenance obligation to children, which establishes an insurable interest. This obligation typically lasts until the child reaches 18 years old, or 25 if the child is still in education or training for a trade and is being supported by the parent or guardian.
Sibling
Like a parent, it makes little sense to take out a life insurance policy on your sibling without a proven insurable interest. However, if you are financially dependent on your brother or sister, it may be worth taking out a policy.
For example, if you have a disability, and your sibling is your carer, you may rely on their income for support. In this case, taking out a policy could help ensure you still have support in place if anything happens to your sibling.
How do I take out a life insurance policy for someone else?
Taking out a life insurance policy for someone else can be a bit more complicated than taking out a policy for yourself.
In order to do so, you would typically need to have an insurable interest in the person you are looking to insure. You would need to show the insurer that their death would have a financial impact on you. You would also need to gather all the necessary information and documents, such as personal details, medical history, and financial information.
Depending on their health, they may have to undergo a medical exam to determine their risk.
You would also need to determine how much cover is needed, taking into account things like funeral costs, mortgage payments etc.
You’ll also need to choose the type of policy. This can have a big impact on the cost of the policy, as policies like whole life insurance are usually more expensive than term life insurance.
But most importantly, you need the consent of the person you want to take out the policy. Without this, you cannot get cover.
Once you have applied for the policy you can write the policy in to Trust. This means that you can specify who you would like the money to be paid for should you pass away, and means the intended recipient will receive the money faster. Learn more about writing your policy in trust.
If you're looking to take out a policy on someone else, it might be worth speaking to one of our advisers. They can provide all the information you need to make a decision on what type of policy is needed. Speak to an adviser for more information.
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