Typically people purchase their own life and disability insurance policies on themselves. However, sometimes people choose to purchase a policy on someone else.
- Juvenile policies. One of the most common times people purchase policies on someone else is when they purchase a life insurance policy on their child or grand child. The benefit of doing so is to protect child’s insurability (the ability to purchase benefits in the future without medical underwriting). Typically people purchase a $100,000 policy on the minor child with several future increase options. This allows the minor to purchase more benefits in the future on certain policy ages and life events (marriage, birth/adoption of child). When the child becomes age of majority, they may take over ownership of the policy.
- Divorce. Oftentimes an attorney will advise people to take out a life insurance policy on a soon to be ex-spouse if they have dependent children together and/or if the spouse owes a significant amount of alimony. This helps the beneficiary in the event of the person dying while still responsible for providing child support or alimony.
- Business partners. Business partners may take out life insurance and/or disability insurance policies on their business partners to protect the business in a buy sell agreement. If there are several partners, sometimes the put together a cross purchase buy sell agreement to protect the remaining partners.
- Spouses. Depending on how you have your estate planning put together, sometimes it is advisable for a spouse to be the owner of the other spouse’s insurance.
- Adult children. Sometimes parents choose to purchase a life or disability policy on their adult children to help them get started or if they can’t afford to purchase it themselves. I see this often with parents of children in medical school. They want to make sure their children are properly protected in the future but may not be able to pay the premiums until they are out of medical residency.
When you purchase a policy on another individual, you must show the company that you have insurable interest. This means that there must be some type of economic interest in that other person. You may not simply take out a policy on a neighbor that you have no business connection with.
For more information about about purchasing an insurance policy on another person, contact Set for Life Insurance today!