Life Insurance: Can I Buy Life Insurance on Someone Else?

As one grows older or gains dependants, it’s common to begin thinking about purchasing life insurance to ensure their loved ones are properly provided for in the event of an expected death. Aside from the obvious benefit of a pay-out to loved ones should you pass, life insurance can also be used as an estate planning tool. It can serve as a tool to lower probate fees, increase the efficiency of estate administration and provide privacy for the testator.

Adding a life insurance policy to your estate plan could even be considered a way of diversifying your investment portfolio. For example, if you buy life insurance on someone else, you will receive the insurance premium in the event that the person passes away. Though it may sound morbid, it is not very different from a person buying life insurance for themselves and then naming you as the beneficiary of the life insurance policy.

When Life Insurance can be Bought on Someone Else

People aren’t allowed to buy life insurance policies on just anyone that they wish. Life insurance shouldn’t be used as a means to gain economically with minimal cost. Two conditions must be met for an insurance company to permit the purchase of life insurance on a person other than yourself. These conditions are:

1. You must have an insurable interest in the person’s life and,
2. You must have the consent and permission of the person to purchase this life insurance.

An insurable interest typically means that you will suffer a financial loss as a result of the person’s death. If there is no insurable interest, you would essentially be gaining financially from the person’s death at no additional cost. Due to the nature of life insurance, insurance companies will require medical tests before creating the life insurance policy. This means that the insured person must be actively involved in the process.

In some scenarios, it’s presumed that the person has an insurable interest in another’s life because of the relationship they have with one another.

Presumed Insurable Interest

In some relationships, it’s presumed that a person has an insurable interest in the other’s life because of the obvious loss that they would suffer if the other were to pass away. This principle arises for:

• Parents and their children/grandchildren,
• Spouses,
• A person’s employees, and
• Business partners.

In these cases, you would only need the person’s consent to purchase life insurance on them. Regardless of the relationship, consent of the person is always required. Note that this list is not conclusive. For a full list, see s.46 of the Insurance Act.

Using Life Insurance as an Estate Planning Tool

Several personal reasons and scenarios may warrant purchasing life insurance on someone else. Sometimes, the person can’t afford payments, so a parent or spouse takes over. In other cases, a death may cause significant hardship, like in a jointly-owned business. By purchasing life insurance on a business partner, owners will be financially compensated should a death cause hardship personally and for their business.

Even for children whose parents have large estates, buying life insurance on them might be a smart plan. By having someone else purchase the life insurance, the pay-out won’t have to go through probate or any estate administration. This way, the person opening the life insurance account can receive part of their inheritance immediately and without paying probate fees on its value.

For businesses that rely on a select few employees due to their highly specialised expertise, it’s recommended that the company purchases life insurance on them. If one of these crucial employees was to unexpectedly pass away, it could leave the company at a significant loss. The life insurance policy could help to alleviate this damage financially. When an employee purchases life insurance for themselves, it’s unlikely they would name their company a beneficiary of the premium.

If you are considering purchasing life insurance on someone else, first think about why the person isn’t buying it for themselves. To determine whether you should purchase life insurance on another person, contact an experienced estate lawyer today. We can ensure that your life insurance and estate plans are carefully arranged to maximize the value of your estate.

Have a question about this topic or a different legal topic? Contact us for a free consultation. Reach us via phone at 250-888-0002, or via email at info@leaguelaw.com.