Can you buy a life insurance policy on your cousin? Your neighbor? A friend who asked you to?
It sounds like a strange question until someone actually asks it. And the answer comes from one of the oldest ideas in insurance: insurable interest.
The idea in one sentence
You can only insure a life when you would genuinely suffer a loss if that person died.
That's the whole concept. The rest is detail.
Why it exists
Imagine it didn't. Anyone could buy a policy on a stranger and collect if the stranger died. You can see where that leads, and why the law and insurers are firm about preventing it. Insurance is meant to repay a loss, not to turn someone's death into a payoff.
Who usually has it
Broadly, insurable interest exists in close, real relationships where there's a financial or family stake:
- Yourself. You always have an interest in your own life.
- Your spouse. A household's income and expenses are shared.
- Your children. Parents commonly insure children.
- Close family who depend on you or you on them. Rules and insurer practice vary.
- A business partner or key person, where the business would suffer a real loss.
The details, and what an insurer will accept, vary by product and by company. I'm describing the principle, not the rulebook of any single insurer.
Where it goes wrong
Two situations I'd flag.
"Can you put it in my name, but I'll pay for it?" When someone else pays your premium, ask why. If a policy is on your life but its real purpose is to benefit the payer, the arrangement needs a clear and honest explanation to the insurer. Never agree to something you can't explain.
Buying cover on someone who doesn't know. An insured person generally has to consent to a policy on their life. A policy someone takes out on you without your knowledge is a red flag.
The roles on a policy
This is a good place to name them, because mix-ups here cause real trouble:
- The owner controls the policy and pays for it.
- The insured is the life covered.
- The beneficiary receives the benefit.
They can be the same person or three different people. We'll get into the roles in another piece. The thing to remember here is that the insured has a stake in how the policy is set up.
The takeaway
If you're ever asked to be on a policy as a favor, to "just sign here", or to help someone buy cover on your life that you don't understand, stop and ask for the plain-language explanation of who benefits and why.
A legitimate arrangement can always be explained simply. If it can't, that's your answer.
The free Life Ready Checklist at lifereadywithvenus.com has a page for writing these down, free and with no sign-up.
