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When Should Someone Else Own My Life Insurance?

September 07, 2022
Our goal is to educate and advise on life insurance options, so you can feel confident in making the right choice, whether that’s through Quotacy or somewhere else. To ensure we provide accurate and trustworthy information, our writers follow strict editorial standards.

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.

You need insurable interest to buy life insurance on someone else.

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 by offering them money to do so and making the deal sound too good to pass up. “I’ll give you $6,000 now, if you let me own life insurance on you. 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.

Owning Life Insurance on Your Spouse

Spouses have obvious 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. 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?

Owning Life Insurance on Your Significant Other

If you aren’t married, you can still buy life insurance on one another as long as you can prove insurable interest. For example, if you and your partner live together, a copy of the lease with your names on it is an easy way to show insurable interest.

Because unmarried couples don’t have the unlimited marital deduction to take advantage of, owning life insurance on each other may be ideal for tax reasons.

The unlimited marital deduction allows spouses to transfer an unlimited amount of money to one another, including at death, without penalty or tax. In other words, you can own millions of dollars of life insurance on yourself and the proceeds will not be included in your taxable estate as long as your spouse is the beneficiary. Unmarried couples don’t have this option.

If you are the owner of your own life insurance policy and the beneficiary is anyone besides a spouse, 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 federal, state, and inheritance estate taxes could apply.

For example, the current individual federal estate tax exemption limit is $11.7 million. And in Minnesota, the 2022 individual state estate tax exemption is $3 million. Any estates with greater value are subject to hefty estate taxes.

(Chances are these limits won’t affect the majority of us but it’s still good information to know.)

If your total estate is nearing the exemption limits, a life insurance policy can easily put you over the edge. Owning millions of dollars of life insurance on yourself isn’t unheard of. But if someone else owns that million-dollar policy instead, you’re good to go.

To avoid your estate getting hit with taxes, have someone else own your life insurance policies.

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.

See what you’d pay for life insurance

Comparison shop prices on custom coverage amounts from the nation’s top carriers with Quotacy.

Owning Life Insurance on Your Business Partners and Employees

When it comes to business, life insurance is important. There are certain individuals in a company who 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.

It’s also common for business co-owners to own life insurance policies on one another. They use them in buy-sell strategies.

If one owner dies, the life insurance policy proceeds are used to buy the deceased owner’s interest from his or her estate.

Learn more about how life insurance and business goes hand-in-hand: Life Insurance to Protect Business Owners

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 from the parents.

This way the insurance will not be part of the parents’ estate upon their death. Keeping the policies out of the parent’s estate ensures an inheritance isn’t taxed more than necessary.

Transferring Ownership

If you buy life insurance and want to transfer ownership to someone else, you have the ability to do so. Policy owners have all the control over a policy.

However, if you’re transferring ownership in order to make sure the proceeds aren’t included in your taxable estate when you die, be aware that you need to survive for more than three years after the transfer.

Life insurance has a three-year lookback period. If you die within three years of transferring ownership, the life insurance will still be included in your estate.

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

2 Comments

  1. Constantine

    Hello from Greece.

    I have just read Ms. Cornelius above article, “When Should Someone Else Own My Life Insurance?”, which is amazing! I learned so much. The fact is that I was attempting to find an answer to a question that I had regarding insurance ownership and, from what I feel is occurring with respect to my wife, what may, in fact, comprise extortion by way of a family member, my father-in-law, attempting to suggest that she, the outright owner of the policy, is required to sign over ownership to him simply because he had paid the premiums on it and that he is her father.

    Would it be possible for someone to explain to me if, in fact, the owner of a policy, in this case my wife, for whom, when she was thirty-one, her father had the bought for her, has any obligation to surrender ownership of the policy?

    Thank you for getting back to me. Have a pleasant, COVID-19-free day.

    Reply
    • Natasha Cornelius

      Hi Constantine,

      We’re in the United States, so I need to first say that life insurance law is not uniform throughout the world. However, in the U.S., the owner of the policy has complete control. Just because a parent is paying the premiums on the policy does not give them the right to take over ownership. The parent can stop paying the premiums and the policy will terminate if your wife does not take over premium responsibility, however. Check with a life insurance company in your country to confirm these laws. I hope you and your family have a safe and pleasant day as well!

      Reply

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