Is it Legal to Take Out a Life Insurance Policy on Someone Else?
Insurance exists to compensate, or indemnify, the policy owner from financial harm. Consequently, insurance companies will not issue a policy that pays benefits if you are not harmed. The reason is to remove incentives to fraud: If there were no restrictions on whom people could purchase life insurance policies, someone could purchase policies on strangers and profit by killing them. Similarly, there are limits to how much insurance you can buy on a given individual: You cannot purchase an amount of insurance greater than the financial loss you expect to incur as a result of the insured's death.
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Background
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The history of the insurance contract goes back centuries, according to the website Financial Shopper Network. Chinese mariners may have entered into life insurance arrangements as long as 5,000 years ago. The ancient Greeks, for example, formed benevolent societies that arranged to provide for the widows and orphans of dead men. Shippers and merchant men in Genoa entered into insurance contracts to indemnify themselves against shipping losses and piracy going back to Renaissance Italy.
Insurable Interest
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Under the doctrine of insurable interest, policy owners must have a legitimate, direct financial interest in the life of the insured -- and must reasonably expect financial harm should the insured die. State law governs the specifics of insurable interest, but there are certain standard elements: You are presumed to have an insurable interest in your own life. You may therefore buy life insurance on yourself to benefit your own estate. However, if you name a beneficiary, the beneficiary must have an insurable interest in your life. You cannot purchase a $10 million policy on your husband, though, if he only makes $50,000 per year and has no other assets: Insurable interest laws prevent insurance companies from issuing contracts that would cause you to profit by killing your husband.
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Insurable Interest and the Family
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Husbands and wives are presumed to have an insurable interest in one another. Minor children have an obvious insurable interest in the lives of their parents, to include adoptive parents. Grandparents and grandchildren are likewise presumed to have an insurable interest in one another, in most cases. Brothers and sisters are presumed to have an insurable interest in one another. Some states recognize an insurable interest between two people who are engaged, as well.
Insurable Interest in a Business Context
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Business owners routinely purchase life insurance on their partners to fund buy-sell agreements, which are contractual agreements for the estate of the deceased to sell his or her partnership back to the surviving partners. The heirs are compensated in cash from the life insurance policy. Business partners have an insurable interest in one another because they enter into contracts together, and each would be harmed by the unexpected death of one of the others, according to the website Tax Analysts. Businesses also frequently purchase "key person" life insurance to protect the company against the loss of a key executive rainmaker, customer or supplier.
Other Cases
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Unless there are overriding factors, such as a business relationship between the beneficiary and the insured, no insurable interest is assumed to exist between cousins or between boyfriends and girlfriends, unless the applicant can provide evidence of insurable interest to the insurance company. Most states prohibit the issuance of an insurance contract where the insured and beneficiary have no financial relationship nor emotional bond.
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