Buying life insurance on a non-family member may or may not be prohibited by the insurance company. Whether you can do this depends on the internal sales policies of the company, your relationship to the person you want to insure and the reason you are buying a policy on his life.
There must be an insurable interest in the life of the person you want to insure. This means that there must be a personal and economic loss that you would suffer if this person died. This limits your options for purchasing life insurance on non-family members. Life insurance companies will not sell you a policy if there is no insurable interest. Even if there is one, the amount of the death benefit will likely be limited.
An example of an insurable interest would be a business partner. Life insurance companies routinely allow business partners to purchase life insurance on each other. This is done so that each person may buy out the others share of the company if their partner dies. Corporations are allowed to buy life insurance on executives in the company. They are also allowed to buy a group life insurance policy to insure the lives of rank-and-file employees.
Life insurance purchased on non-family members has important business and economic consequences. For example, business partners buying life insurance on each other allows the partners to use capital reserves of the company more efficiently. Instead of setting aside significant resources to buy out each other, they may use only a portion of the business's assets and allow the life insurance company to handle the financial risk of death.
Before buying life insurance on the life of a non-family member, you should consider the reason. If you are using the life insurance policy as an investment in the person's death, this action will be disallowed by the insurer. However, life insurance settlement companies allow you to buy existing life insurance contracts where the beneficiary named is either you or the settlement company. You share in the profits of the settlement company when the insured person (who is normally a stranger) dies.
- "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007