Can I Get an Insurance Policy on a Family Member?
Life Insurance pays a cash death benefit, generally tax free, to the beneficiary designated by the policy owner. It is usually used to protect a family against the loss of a breadwinner's income, to protect a family against the risk of having to hire a new caregiver in the event of the death of a stay-at-home mother, to protect a creditor against the death of a borrower, or to protect business partners in the event of the loss of a fellow business owner. The sale of insurance policies are governed by specific rules about who can purchase life insurance and under what circumstances.
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History of Life Insurance
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The history of life insurance goes back thousands of years. The ancient Greeks formed mutual aid societies in which members pledged to care for the children of other members in the event of their death. Chinese merchants entered into life insurance contracts with one another as long as 5,000 years ago. And the practice of insuring merchants and mariner's families against cargo and crews lost at sea goes back centuries.
Insurable Interest Theory
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The general theory of insurance is that the risk of death must be unpredictable, and that the beneficiary of a life insurance policy should actually suffer a bona fide financial or personal hardship if the insured should die. Beneficiaries should not profit from life insurance policies.
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Application of Insurable Interest Theory
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The various state insurance regulators have different specific rules governing who may purchase life insurance on whom, but a few general principles are constant: You have an insurable interest in yourself. You also have an assumed insurable interest in a spouse and to a lesser degree, any children. You have an insurable interest in brothers, sisters, parents and grandparents in most circumstances. Some states allow for an insurable interest in fiancees.
Amount of Insurance Allowable
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Insurable interest theory also governs the face amount of any insurance you purchase. You can purchase a much larger multiple of income amount on a young breadwinner than you can on an older worker, because the younger worker has many years of income ahead of her. For this reason, you may be able to purchase a death benefit of 30 times the annual income of a person just out of college, but the insurance company will limit you to purchasing perhaps 10 times annual income on a 50-year-old, unless special circumstances apply, such as a large estate tax planning need.
Permission
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Generally, you must get the family member's permission or the permission of his guardian to take out a life insurance policy on her. Few companies will issue a policy without the permission of the insured. If you are purchasing insurance on your own children, you will have to convince the insurer that the face amount requested is reasonable under the circumstances.
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