In Canada, purchasing life insurance for another person and designating yourself as the policy beneficiary is indeed feasible. However, there are specific prerequisites for doing so. You must establish that you possess a genuine insurable interest in their life and have obtained their consent.
The act of buying life insurance on someone else becomes a prudent and lawful choice when you can prove to the insurance provider that the individual’s demise would have a direct financial impact on you.
In this blog post, we will provide comprehensive insights into the intricacies of buying life insurance on someone else, whether it’s for family members or business partners.
Can You Take Out Life Insurance on Someone Else?
Absolutely, you can buy life insurance for someone else, be it whole or term life insurance. However, there are two crucial aspects you need to understand when doing so.
First and foremost, you must have the person’s permission to purchase life insurance on their life. They must sign the life insurance application and provide their consent.
Furthermore, you must show that you have an insurable interest in the insured person’s life. In other words, you should demonstrate that you would suffer a financial loss if the person you want to insure were to pass away.
In addition to signing the application form and providing written consent, the insured individual must also authorize the insurer to gather information, such as their medical history.
Furthermore, the insured may be required to undergo a medical examination as part of the life insurance application process. It’s important to note that obtaining a life insurance policy without the insured’s consent and active involvement is nearly impossible.
How To Take Out Life Insurance on Someone Else
Buying a life insurance policy for someone else follows a similar process to getting one for yourself. The key differences are that you’ll need the other person’s written consent and must demonstrate a legitimate financial interest in their life.
1. Choose the Right Type of Life Insurance Policy
First, decide whether you need permanent or temporary coverage. Term life insurance offers lower costs but coverage for a specific period, like 10, 20, or 30 years. Permanent life policies provide coverage as long as you pay premiums and accumulate cash value you can access through withdrawals or loans.
Most term and permanent life policies typically require a medical examination. However, if the insured has significant health issues or prefers to avoid the medical test, consider simplified or guaranteed issue policies. These allow you to skip the medical exam but offer more limited coverage.
2. Shop Around for the Best Quotes
Each insurance company, like Policyme, uses its own criteria for pricing policies. As a result, you might receive different quotes from various insurers for the same coverage. Gathering quotes from multiple providers can help ensure you get the best possible rate.
RELATED: The 9 Best Life Insurance Companies In Canada for 2023
3. Secure the Insured’s Consent
Once you’ve determined the type of policy and selected an insurer, it’s time to complete the life insurance application. You must note that you cannot purchase a life insurance policy on someone without their knowledge or involvement in the application process. The person will have to be involved in the entire application process.
In most cases, you will need the person’s signature on the final paperwork and cooperation as the person may need to undergo medical underwriting, which involves answering personal health questions.
Some insurance policies from some insurance companies will require the insured to take a life insurance medical exam. Even if you are taking care of the contractual details of the insurance policy and paying the premiums, you will need the insured’s consent as they have to be part of the application process. The only exception to this rule is when you buy life insurance for children.
4. Demonstrate Insurable Interest
When acquiring life insurance for another person, proving a legitimate interest in their well-being is a critical part of the application process. Without this, no insurance company will issue a policy. The insurer will verify the insurable interest by various means, including requesting identification from both the insured and the policyholder and possibly conducting interviews either over the phone or in person.
A person or entity is said to have an insurable interest in another person when the death or loss of that person would cause a financial loss or other hardships to that person or entity. In most cases, a person is known to have an insurable interest in his own life, as well as in the life of:
- His children or grandchildren;
- His spouse;
- His business partner or key employee;
- Any person whom you wholly or partially depend on for support or education
When applying for life insurance on someone else, you must prove that you will suffer a financial loss if the person dies. It is also sometimes called ‘financial/pecuniary interest.’
You will need to prove to the insurance company that you won’t gain financially from the person’s death and that their death would financially burden you. Insurance companies do not want to encourage people to shorten anyone’s life, so they want to see that you benefit from the person being alive.
Who Can You Buy Life Insurance On?
There are certain situations where it’s reasonable to consider buying life insurance for someone else. You might find it necessary to obtain a life insurance policy for any of the following individuals under these circumstances:
1. Your Parents
There are situations where buying a life insurance policy for your parents makes sense. You might consider this if your parents lack their own insurance and you want to cover their funeral and final expenses. Additionally, if you share loan co-signing responsibilities with your parents, having an insurance policy on them can help you clear the loan upon their passing. Long-term care for your parents is another reason to consider purchasing a policy.
2. Your Spouse
Taking out a life insurance policy on your spouse can have various reasons. If you are the primary breadwinner and your spouse doesn’t have a source of income, you can provide financial protection by paying for the policy. However, it’s essential to note that you cannot purchase life insurance on your spouse without their consent. They must undergo the underwriting process and sign the necessary paperwork.
3. Your Business Partner
If you co-own a business, buying a life insurance policy on your business partner can be beneficial. Such a policy can fund a buy-sell agreement in the event of your partner’s passing. When your partner dies, you’ll receive a death benefit payout that can be used to buy their share of the business from their surviving family or spouse.
4. A Key Employee
As a business owner, you can consider key employee insurance for an employee who significantly contributes to your business. In the unfortunate event of their passing, this policy can help cover your business liabilities while you search for a replacement. It’s important to note that, in this case, your business is the policyholder, pays the premium, and receives the benefits, but you still need the employee’s consent.
5. Your Child/Grandchild
Parents, grandparents, and legal guardians can purchase life insurance for their children or grandchildren. This policy protects a child’s insurability, even if they develop health conditions or take up dangerous hobbies later in life. Additionally, child life insurance builds cash value that can be accessed in the future, and in case of premature death, the policy’s payout can cover final expenses. Obtaining this insurance is relatively easy as children do not need to provide consent, sign the policy, or undergo a medical exam.
6. Your Former Spouse
Buying a life insurance policy on your former spouse can be essential, especially if you receive spousal or child support payments from them. Their support payments represent a legitimate insurable interest, as their passing would result in a financial loss for you. In some cases, the court may even order the purchase of a life insurance policy on your former spouse.
7. Your Sibling
If your sibling is caring for one or both of your parents, you have a legitimate insurable interest in them, making it possible to purchase a life insurance policy on their life. By naming yourself as the beneficiary, you ensure you receive the death benefit payout if your sibling passes away. This payout can be used to cover your parents’ care costs and hire additional assistance when needed.
Final Thoughts on Buying Life Insurance on Someone Else
The concept of buying life insurance on someone else opens up a world of possibilities to safeguard the financial well-being of your loved ones or protect vital business interests. With the right knowledge and understanding of the process, you can make informed decisions that provide you with peace of mind.
If you’re ready to explore this avenue further and want expert guidance on securing the right life insurance for your unique situation, please contact our experienced insurance advisors today.
FAQs on Buying Life Insurance on Someone Else
Is it illegal to take out life insurance on someone else?
No. It’s absolutely legal to own a life insurance on someone else. You are good to go if you get the insured’s consent and insurable interest.
Can someone take a life insurance policy out on me without my knowledge?
No. No one can take a life insurance policy out on you with your consent or participation in the application process. After all, they need you for the medicals and to prove they rely on you financially.
What happens when the insurable interest disappears?
Suppose the relationship between you and the insured changes, and the insurable interest is no longer there after the insurance policy is issued. In that case, the insurance policy is still considered to be valid.
