Can anyone take out a life insurance policy on someone else?
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- The short answer is No
- There must be a relationship between the two parties such that the insured’s death would cause a loss to the policyholder
- This restriction makes life insurance a positive for society by preventing the abuse of life insurance policies by people with bad intentions
It is not legal for just anyone to take out a life insurance policy on someone else. In order to take out a life insurance policy, a person must have an insurable interest in the individual they wish to insure.
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What does that mean?
It means that the two people in question need to have a relationship such that if one of them dies, the other will experience some kind of loss. That loss may not be entirely financial, but it can be compensated to some degree by money.
For instance, family members are generally assumed to also suffer emotional loss due to the death of their relative, beyond the financial impact involved.
Life insurance is not intended to be a means of financial gain. It is intended solely to mitigate genuine loss. Thus, there must be a pre-existing relationship that is benefiting the person or entity seeking to take out a policy.
Why do you need insurable interest?
Have you ever seen the movie Ransom? Spoiler Alert: Mel Gibson’s character takes the ransom money and turns it into a bounty on the head of the person who kidnapped his son.
This basically makes the man a walking, talking lottery ticket for anyone willing to sell him out.
Similarly, if it were legal to take out a life insurance policy on just anyone, you could basically turn anyone into a walking, talking lottery ticket that pays off for you when they die. This would go very bad places, very quickly because it would actively incentivize murder for profit.
In fact, there have been cases where people claimed insurable interest that did not exist in order to do exactly that. So, this is not mere speculation. It is established fact that there are people who will do this if they can get away with it.
Thus, it is not legal to take out a life insurance policy on random strangers. It is also not legal to take out a policy on most of the people you know in life. Most of your acquaintances, friends and even relatives will not have the type of relationship that you will have insurable interest in their life and vice versa.
Instead, you have to have a relationship to the person such that you have a valid reason to insure their life. That valid reason must be related to current benefits from the relationship which would involve a personal loss to you in the event of their death.
What kind of relationships qualify?
In most cases, people take out life insurance themselves. The vast majority of the time, they are taking out insurance on themselves and naming their loved ones as beneficiaries.
These loved ones are typically financially dependent upon them to some degree. The beneficiaries are most often the spouse and minor children.
But there are cases where someone else takes out life insurance on an individual. According to the insurable interest doctrine, insurable interest exists when the individual is currently benefitting the person or entity taking out the policy such that their demise would incur a loss to them.
In simpler terms, the test in insurance is that you can take out insurance on someone that you have reason to value more if they are alive than if they are dead.
In other words, you can take out a life insurance policy on them under circumstances where you inherently benefit more from their continued existence than you would from the proceeds of the policy.
Otherwise, a life insurance policy would just turn them into a living, breathing lottery ticket that could be cashed in upon their death. This would be an active incentive to help encourage that event, either by omission or commission.
Life insurance is intended to help mitigate the loss in order to help preserve the fabric of society. It is intended to allow people to fulfill certain obligations even if they die.
It is not intended to be an ugly incentive that actively devalues their existence and makes them merely a dollar value in the eyes of other people.
Beyond family members who are financially or otherwise dependent, the most common cases are creditors and employers. Financial institutions often have creditor life insurance policies that will reimburse them for the value of the loan if the creditor dies.
These are typically group policies that cover a large number of people. For example, a credit card company may have life insurance on its card holders.
Employers sometimes take out insurance on key employees with specialized knowledge, such as the CEO. The reason this is done is because the company can be seriously crippled by the person’s loss in such a way that additional funds are needed to keep the business alive until they can be effectively replaced.
What about life insurance as a form of charitable giving?
Perhaps you have heard that it is possible to arrange to use life insurance for purposes of charitable giving. While it is true that this is a modern exception to the rule of insurable interest, it is not an exception to the rule about who can take out insurance.
Such policies or riders are generally arranged by the individual being insured because they desire to leave some money to charity upon their death.
Charities themselves cannot take out life insurance policies on just anyone in order to enhance their income stream from the death of random individuals.
So, yes, technically, in the modern world, life insurance is being uncoupled a little bit from the historical doctrine of insurable interest. But this does not change the fact that there are restrictions on who can take out the policy on a particular individual.
These limitations on who can take out a policy constitute a significant safeguard against the misuse and abuse of life insurance. Life insurance is intended to be a civilizing force that helps people fulfill important personal obligations from beyond the grave.
It is not intended to undermine the value of their life by making them worth more dead than alive to anyone, but especially not to someone who doesn’t care about them, to begin with.
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