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Can someone else own my life insurance policy?

Do you prefer to learn by watching? We answer this question in a video below. Click here to jump ahead.

The life insurance industry is highly regulated and the process of approving an application is very thorough, so you do not have to worry about someone out there owning a life insurance policy on you without your knowledge.

There have been cases in history when nefarious individuals have convinced others to let them buy life insurance on them and then that person mysteriously dies not soon after. One of the most infamous of these insurance fraud artists was H.H. Holmes – but the life insurance industry has come a long way since the late 1800s.

The foremost requirement of the ability to purchase life insurance on someone is having insurable interest. Having insurable interest in someone means that if they were to die, it would affect you financially.

Back in the day, H.H. Holmes persuaded many individuals to let him own life insurance on them even though they were essentially strangers. He convinced these people to let him take life insurance policies out on them by offering them money to do so. Making the deal sound too good to pass up – “I’ll give you $6000 now, if you let me own life insurance on you in which I will even pay the premiums as long as you make me the beneficiary so I make money after you die.” This deal would never pass inspection today.

While it is common to own your own life insurance policy, there are certain cases in which it makes sense for someone else to own it. Let’s go over a few of these examples.

  1. Owning Life Insurance on Your Spouse

Obviously spouses have insurable interest in one another. If one dies, the other is likely to struggle maintaining their same standard of living. If you have had two incomes going toward mortgage payments, bills, and child care, having one income become suddenly non-existent would take its toll almost immediately.

Many married couples own life insurance on each other versus owning their own policy to avoid possible tax implications. If you are the owner of your own life insurance policy, it becomes part of your taxable estate when you die. Owning your life insurance policy could put you past the tax exemption threshold which would mean estate taxes would apply.

For example, in Minnesota the 2017 individual estate tax exemption is $1.8 million. (Now, chances are this won’t affect the majority of us but it’s still good information to know.) If your estate is worth $850,000 when you die, you won’t be hit with an estate tax, but if you also own your own life insurance policy that’s worth $1 million, that is added to your total and now you’re getting a big tax bill. If your spouse owned that $1 million policy instead, you’re good to go.

Sometimes a spouse will own life insurance on their counterpart for reasons that have nothing to do with estate taxes. Maybe one spouse realizes the importance of life insurance while the other just doesn’t share the same opinion or feels they don’t have time to get life insurance. The spouse who knows its value may take control, fill out the application, and just tell their spouse where to sign on the dotted line. While we hope couples have discussions about finances often and can agree on the importance of life insurance, not every couple sees eye-to-eye on certain topics.

Read more: How do I get my spouse to buy life insurance?

  1. Owning Life Insurance on Your Children

Parents will own life insurance on their children for two main reasons: having the financial flexibility to take off work and provide a proper burial and funeral should the unthinkable occur, and to lock in their child’s future insurability.

A child rider on the parent’s own policy is one option. You can learn more about how this works in our blog post Everything You Want to Know About Child Riders.

Another option is to buy a permanent life insurance policy on them in which you can one day even transfer ownership to them. You can learn more about how this works in the post Buying Life Insurance on Your Children.

The foremost requirement of the ability to purchase life insurance on someone is having insurable interest.  Having insurable interest in someone means that if they were to die, it would affect you financially.

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  1. Owning Life Insurance on Your Business Partners and Employees

When it comes to business, life insurance is important. Often times there are certain individuals in a company whom are vital to its success. These certain individuals are “key persons”. A key person could be a business partner, a salesperson with strong customer relationships, or the analyst who knows the system in which they base all communications, essentially anyone whose death could directly affect the future of the company. It makes total sense for the business to then own life insurance on these key persons. The business has an insurable interest in these employees.

  1. Adult Children Owning Life Insurance on Their Parents

Adult children can own life insurance on their parents if they have insurable interest. As an example, perhaps the parents have a business or farm and one of their two children will not be participating in that business endeavor. Instead of having to sell or split the estate after the death of the parents, which could be devastating to the farm’s success, one child would get the farm and the other the insurance policy. The policy would be owned by the child and premiums could be offset by gifts of cash. This way the insurance will not be part of the parents’ estate upon their death.

It’s a common question: Can you buy life insurance on anyone? The simple answer is no. The complicated answer is yes, but you have to have insurable interest in that person, not to mention their permission. If you have any further questions on owning life insurance on someone else, don’t hesitate to contact Team Quotacy. Our friendly, helpful agents are standing by ready to assist you through the life insurance buying process.

 

Watch the Someone Else Owning My Life insurance Video

Video Transcript

Welcome to Quotacy’s Q&A Friday where we answer your life insurance questions. Quotacy is an online life insurance broker where you can get life insurance on your terms.

I’m Jeanna and I’m Natasha.

Today’s question is:
 
Can someone else own my life insurance policy?

 
 
It’s very common to own your own life insurance policy. But there are cases in which it makes sense for someone else to own it. Let’s go over four common scenarios of owning life insurance on someone else.

One Spouse Owning Life Insurance on Another Spouse

Spouses buying life insurance policies on one another happens all the time.

You could, of course, simply own your own policy and name your spouse as the primary beneficiary. But sometimes couples don’t see eye-to eye on financial aspects. Maybe one spouse realizes the importance of life insurance while the other just doesn’t share the same opinion or feels they don’t have time to get life insurance. The spouse who knows its value can take control, fill out the application, and just tell their spouse where to sign on the dotted line and when to be home for the medical exam.

While this is perfectly legal, we do recommend couples have discussions about finances on a regular basis and hope both come to realize the importance of life insurance.

» Compare: Term life insurance quotes

A Parent Owning a Life Insurance Policy on a Minor Child

Another common example of owning life insurance on someone else is when a parent owns a policy on their child.

Parents will own life insurance on their children for two main reasons: having the financial flexibility to take off work to provide a proper funeral should the worst occur, and to lock in their child’s future insurability. Once the child is a legal adult, the policy ownership can be transferred from the parent to the child if desired.

A Business Owning a Life Insurance Policy on an Employee

Another common ownership scenario is owning life insurance on business partners or employees.

In a business there are often key people whom are vital to the success of the business. These individuals could be co-owners or partners, a salesperson with strong customer relationships, or the analyst who designed and knows the ins-and-outs of the computer system.

“Key People” might work in…
 

  • Operations – ex: the person is essential in keeping work flowing efficiently
  • Partnerships – ex: the person knows key industry players
  • Profitability – ex: the person manages financials and ensures the company stays afloat

 
 
The definition of a key person is essentially anyone whose death could directly affect the future of the company.

In a situation like this, it makes total sense for a company to own life insurance on the key person. If this person died, the death benefit from the life insurance policy could provide a financial cushion, help offset lost business value, recruit and hire a qualified replacement, etc.

The payout from a key person life insurance insurance policy could be used to
 

  • Replace lost earnings
  • Maintain business credit
  • Provide a financial cushion
  • Offset lost business value
  • Recruit and hire a qualified replacement

 
 

An Adult Child Owning a Life Insurance Policy on a Parent

A fourth example of life insurance ownership is adult children owning life insurance on their parents. This is a common way to equalize an inheritance.

For example, let’s say a family owns a business but not all the children are interested in working there. Parents are likely to leave the business only to the children interested in running it but may still want to leave behind something to the other children. The death benefit from a life insurance policy can provide money to take care of final expenses and leave that inheritance.

» Learn more: How to Use Life Insurance for Inheritance Equalization for a Family Business

In order to not be included in the parents’ taxable estate, it’s not uncommon for parents to transfer ownership of the life insurance policy to an adult child. The child would then become responsible for the premium payments but the parents could gift the child money to pay the amounts if they choose.

If you own life insurance on someone else, you need to have insurable interest and consent except for in the case of a parent owning a policy on their minor child. The parent does not need their child’s permission. And instead of insurable interest, sentimental interest is acceptable in the life insurance industry in this situation since parents do not rely on their children financially.

In addition to sentimental interest, spouses definitely have insurable interest on one another. If one of them were to die, the surviving spouse would likely struggle financially.

In the business world, a company often has an insurable interest in specific employees and partners. But, don’t worry, an employer needs to provide proof of insurable interest and the employee’s consent. They can’t just buy life insurance policies on anyone they want.

As you’ve learned, there are certain situations in which someone else owning your life insurance policy makes sense. In most cases, the only disadvantage to this is that you’re not in control of it. There are quite a few hoops to jump through if you want to own life insurance on someone, so don’t be alarmed thinking someone else owns a policy on you without your knowledge.

If you want to learn more about life insurance consent and insurable interest check out our other Q&A video: Buying Life Insurance on Someone Else.

If you have any questions about life insurance, make sure to leave us a comment. If you’re ready to get quotes, check out Quotacy.com. We’re here to help you find the best deal on the life insurance you want.

Photo credit to: aaandrea

 

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius

Writer, Editor, and Co-Host of Quotacy’s Q&A Friday YouTube Series

Natasha writes and edits content and is co-host of Quotacy’s YouTube series. She is also working toward her Chartered Life Underwriter (CLU) designation. When not working or studying, you’ll find her throwing a tennis ball for her pitbull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on.