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.
- 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 exception threshold which would mean estate taxes would apply. For example, in Minnesota the 2016 individual estate tax exception is $1.6 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 $750,000 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 $1M, that is added to your total and now you’re getting a big tax bill. If your spouse owned that $1M 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.
- 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 Life Insurance Coverage for Children. 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.
- 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.
- 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 devasting 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.