Even if you don’t work in the insurance industry, it’s likely that you’re fully aware that you can take a life insurance policy on someone in your immediate family. That would include, at a minimum, your spouse, your children, or anyone who is a member of your household by blood or by adoption.
But that’s hardly the limit as to who you can take a life insurance policy on.
An Insurable Interest Is Required For Any Life Insurance
The insurance industry actually allows you to take a life insurance policy on anyone with whom you have an insurable interest.
An insurable interest, very simply, is a relationship in which one party will suffer financial loss in the event of the death of the other. In the broadest terms possible, it means that it is someone with whom you share a financial interest. It’s also a provision that exists to prevent total strangers and other disinterested parties from taking a life insurance policy on someone else, strictly for personal financial gain, even though they will not suffer financially upon that person’s death.
Considering the insurable interest provision, the field of people on whom can take a life insurance policy opens up substantially.
Extended Family Members
Generally speaking, the insurance industry takes the view that an insurable interest automatically exists in regard to anyone with whom you share a blood relationship. That moves the possibilities beyond your immediate family, out to just about any member of your extended family, even if you don‘t live with them, or have a business relationship with them.
That can include your parents, brothers, sisters, grandparents, and even aunts, uncles, and cousins. It is entirely likely however that the farther out you go on your family tree, the more questions your life insurance company will ask. At a minimum, you may need to prove the relationship, particularly if you have different surnames. In some cases, it’s even possible that they may look for an insurable interest, in addition to the blood relationship.
Unmarried Partner or Fiancée
In most cases, life insurance companies will accept life insurance policies taken out on members of your household, even if they are not related to you by blood or marriage. This can include a fiancé, a same-sex partner, or even a completely unrelated roommate.
Anyone who you live with is likely to represent someone in general with whom you have an insurable interest. For example, if that person helps to pay your rent or mortgage, or even pays certain utility bills or contributes toward the grocery bill, that’s an insurable interest.
In certain cases, though not commonly, an insurance company may request that you document the existence of that insurable interest. This can include evidence of sustained residency (a signed lease should do the job), utility bills in the name of the unrelated person, or evidence of payment certain common obligations.
Business Associates
Life insurance policies taken out on business associates is extremely common. This can include policies taken out on other members of the business partnership, or owners in a small corporation (S or C Corporation). The purpose of such policies is so that the surviving owners of the business will be able to buy out the share of the deceased partner from the partner’s family. This will allow the business to continue, and may even be sufficient to provide additional working capital, enabling the business to adjust to the sudden absence of the departed partner.
Life insurance policies can also be taken out by a business on its employees. This is often referred to as “key man” life insurance, since it is taken out on the lives of employees who are deemed to be significant contributors to the business. It is entirely possible that certain employees may be so important that their death would threaten the survival of the business.
Businesses may also take out life insurance to cover certain large obligations, particularly debts. The death of one of the owners in a closely held company can make it difficult or even impossible for the remaining owner(s) to service a large debt obligation. A life insurance policy on each of the owners would provide the capital to payoff the debt in the event of the death of any one of them.
Creditors
Typically referred to as credit life insurance, this is a life insurance policy taken out by a creditor on the life of the borrower. The rationale is that in the event of the death of the borrower, the loan would automatically be repaid out of the proceeds of the life insurance policy.
Even as an individual, you can take out a life insurance policy on someone to whom you made a loan. This can provide you with the same benefit as lenders from the credit life insurance policies. In the event that the person that you made the loan to were to die, the proceeds from the insurance policy would cover the repayment of the loan.
You can also take a life insurance policy on someone for whom you have cosigned a loan. In the event of the death of the primary borrower, you would become fully responsible for repayment of the remaining debt obligation. A life insurance policy taken on the primary borrower would provide you with the proceeds to pay the loan off upon his or her death. In this regard, the fact that you are now jointly obligated on the loan means that you automatically have insurable interest.
Never think that the only people you can take life insurance policies on are your immediate family. There’s actually a wide range of people with whom you can be deemed to have insurable interest. And if you need such an insurance policy, give us a call and we can help. After all, life insurance is what we do.
