Who Can Buy Life Insurance?

Life insurance contracts involve a contract purchaser making premium payments to an insurer that agrees to make a payout if an insured person dies within a specific period of time. Insurance policies are legal contracts and consequently only legal adults, who are typically defined as people over the age of 18, can buy insurance contracts. However, aside from age limits there are few restrictions on buying insurance contracts.

Family

You can buy life insurance on yourself and name family members or friends as the contract beneficiaries. Many people buy life insurance on family members including their spouse, parents and children to ensure they have sufficient funds to cover the cost of a funeral. Most insurance contracts are term-life contracts which mean you buy coverage for a certain number of years. However, you can also buy whole-life insurance for yourself which lasts for your entire life and has a cash value that allows you to withdraw funds during your lifetime.

Employers

Tax laws enable employers to offer insurance premiums as tax deductions. Traditionally, companies bought insurance polices on so-called "key-employees," without whom the company could not operate fully. However, insurance laws in most states enable employers to buy insurance policies on employees of all job levels. Companies enjoy tax write-offs by investing in these policies as well as the financial benefit of a payout if an employee dies. Industry insiders refer to these policies as "dead peasant policies" and you do not have to consent for your employer to buy one.

Viatical Settlements

You normally buy an insurance policy directly from an insurance provider but you can also buy a policy from a contract holder in a process known as a viatical settlement. Laws vary on viatical settlements from state to state but in Illinois, someone with a terminal illness expected to live less than 24 months can sell an existing insurance policy to an investor. The policyholder receives a lump sum cash payment which helps cover medical or hospice costs while the policy buyer receives the insurance payout when the original contract holder dies. People with chronic illnesses can also sell their insurance policies but you cannot obtain an insurance policy if you have already been diagnosed with a terminal or chronic illness.

Stranger-Originated Life Insurance

Some investment firms broker deals involving stranger-originated life insurance. These deals involve an investor persuading someone to buy a life insurance contract and naming the investor as the beneficiary in return for an upfront payment. People involved in these deals often target elderly people. Each state has its own insurance laws but organizations such as National Association of Insurance and Financial Advisors have lobbied against STOLIs due to ethical concerns as well as the potential for fraud. However, as of 2011, STOLIs are still legal in many states.

References

• ABC News: "Are 'Dead Peasant' Life Insurance Policies Fair? "; Claire Shipman and Chris Strathmann; October 2009
• Illinois Insurance Facts: Viatical Settlements, Accelerated Death Benefits, and Stranger-Originated Life Insurance; July 2010
• Kiplinger: "When Should You Buy?"; July 2007
• NAIFA: STOLI: The Problem and the Appropriate State Response: 2010

Resources

• CNN Money: Life Insurance