Every once in a while I will be having a conversation with someone who wants to know if it is possible to insure someone else, like an acquaintance. When this happens I don't really know if they are kidding or not, but I ask if there is some sort of relationship there between the two of them. Usually the answer is "no, you can't" which seems simple enough but people ask why.
Can you imagine the madness that would ensue if people just went around insuring the lives of people they didn't know but "looked sick"? And if insurance companies had to pay those claims they would be out of business quickly.
There are some guidelines (and reasons for them) when it comes to insuring other people. One of the basic rules for this is that there must be an insurance interest. In other words, before you take out a policy on someone else, you must have a relationship, either familial, personal or financial, with that person. Of course we can take out a policy on a spouse or child, as people do that all the time.
And if you borrow money from a financial institution or an individual, they may require a policy to secure the loan. That is considered acceptable as well.
Another piece of this is that most states forbid insuring someone over the age of 16 without their knowledge. But if the insured is over 16 they must sign a form acknowledging they are being covered. This rule applies even if the insured is your 18 year old child.
Back in the old days big companies would buy life insurance policies on all of the employees, with the company being the beneficiary. The thought process was that if the employee died there would be "transition costs" associated with finding a replacement. These Corporate Owned Life Insurance (COLI) policies became controversial when family's in need began learning that the death of their loved one was profitable to their deceased loved one's employer.
The issues arose (as well as lawsuits) when the insureds were no longer in the employ of the company. At that point, any insurable interest went out the window. In the early 2000's several of these types of legal issues got some news publicity which shined a light on how many large corporate companies were secretly adding to their bottom lines.
Nowadays, COLI's are still used, but not covering every employee, including the janitor. (They were actually called "janitor policies" because of this). More often than not, COLI's are used to cover the lives of the top brass, like the board of directors or top executives, who are supposedly fully aware of the policy. I have even heard that the beneficiaries of the policies are split among the company and family members. That sounds much fairer.
With all of that said, here is a short list of people you can insure:
- Family. When the life insurance agent asks what your relationship is to the insured, immediate family is a no-brainer. Be aware that there are limits on insuring children but otherwise you should be okay.
- Former family. As in ex-spouses. If there are children involved the court may order that you maintain a life insurance on your former spouse to help with expenses if the former spouse should die.
- Parents. Yes, they are family but they may have let their life insurance policy lapse or expire and a final expense plan may be the best answer.
- Business partner. Buy/sell agreements are usually written up between business partners to help ease with the transition of responsibilities when one of the partners dies. These agreements are usually funded by a life insurance policy so one partner can buy out the deceased partners ownership.
- Key employees. Key employees are the ones who contribute significantly to the business or may have some highly specialized skill. These people are difficult to replace and if they die unexpectedly the company could take a financial hit.
If you have any questions about any of these scenarios, ask your agent or drop us a note in the comments. In the meantime, stay healthy!
Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life, disability, long term care, cancer, accident and other insurance coverages in North Carolina, South Carolina, Virginia, Tennessee and Georgia. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast. And please subscribe to this blog!