Can You Take a Life Insurance Policy Out on Anyone?

Is it possible to take out a life insurance policy on a business partner? What about your spouse? Can you buy a policy insuring the life of a relative? Cue: dramatic movie music.

Unlike Hollywood movies, you can’t hatch a plan to secretly insure the life of someone else. While it is possible to take out a life insurance policy on your spouse, business partner, or relative, there are strict rules in place to make sure that the person purchasing the policy has an “insurable interest” and that the person being insured has given their consent.

In this article, we’ll explain why you might want to take out a life insurance policy on someone else, how it works, and what requirements need to be met to purchase a policy on another person.

Key takeaways

• Typically, a life insurance plan is purchased by the person covered under the policy.  However, sometimes there are good reasons to take out a policy on someone else.

• Taking out an insurance policy on someone else requires their consent as well as proof that the policy holder has an insurable interest in the insured person.

• You might consider taking out a life insurance policy on your spouse, your business partner, or your children.

• The rules around taking out a life insurance policy on someone else are strict to avoid fraud or exploitation.

What does it mean to take a life insurance policy out on someone else?

When you purchase a life insurance policy in someone else’s name, you are considered the policyholder which means that you pay the premiums. You select the beneficiary (in most cases, it’s you) and a death benefit is paid to that beneficiary when the insured person dies.

There are several situations where you would qualify to take out a policy on someone else. For example, spouses would typically qualify as having an insurable interest in the life of their marital partner (we’ll explain this concept in detail later in this article) due to the nature of their relationship and their close financial ties.

What to consider when taking out an insurance policy on someone else

There are legal, ethical, and privacy concerns that come with taking out a life insurance policy on a relative or business partner. Before beginning your application, consider the following:

Permission

Trust and transparency are of utmost importance when taking out a life insurance policy on someone else. It isn’t possible to purchase life insurance on another person without their permission. Their participation in the application process is mandatory.

You must have consent from the insured person. Your insurance provider will ask for application signatures from both you as the policyholder and from the insured person.

Insurable interest

If you decide to take out a life insurance policy on someone else, you need to have a clear understanding of the term “insurable interest.” Your insurance provider will ask that you demonstrate insurable interest as part of the application process.

Insurable interest means that you have a financial stake in the life of the insured – if they were to die, you would experience a financial loss by their death. When it comes to family relationships, demonstrating insurable interest is usually straightforward. As a rule, insurance providers acknowledge direct dependants and relatives (through blood, marriage, or adoption) to have insurable interest – but they aren’t the only relationships that qualify for this type of coverage.  

Business relationships can also have insurable interest, but business partners will need to work a little harder to prove insurable interest. They will be asked to provide documents that certify their fiscal relationship and the negative financial impact that the insured’s death would have on the business.

In either case, the process of proving insurable interest is likely to entail meetings or telephone conversations between the insured and the insurance provider as well as the requirement to submit documents that demonstrate a family or business relationship.

Fraud prevention

Your insurance provider will take steps to make sure that each requirement for consent and insurable interest is met. A valid insurance contract requires proof of insurable interest – evidence that if the insured were to die, the policyholder would suffer a financial loss – and consent from the person you are insuring. These two requirements act as a safeguard against someone attempting to take out an insurance policy on someone without their knowledge or permission.

Jurisdictional differences

Canadian provinces and territories each have their own insurance laws and regulators. Your insurance provider must adhere to the laws in the province or provinces where they operate, including provincial rules regarding insurable interest and consent. Outside of Canada, laws relating to taking out a life insurance policy on another person will vary.

Privacy concerns

In addition to consent and insurable interest, potential policyholders should consider the fact that sharing personal and medical information can raise concerns about privacy and will likely need to be handled with extra care and sensitivity. A medical examination may also be required for the person you want to insure, depending on the type of policy you want to purchase.

When does it make sense to take out insurance on someone else?

Purchasing a life insurance plan on another person can make good financial sense. These are some examples in which a potential policyholder would be able to demonstrate insurable interest on the person they’d like to insure as well as some reasons they might want to do so.

Family protection

Financial security for your family’s future is among the primary reasons you might choose to buy a life insurance policy for yourself. It’s also the reason you might take out a policy on your spouse.

If something were to happen to your spouse, a life insurance policy death benefit payout could protect you and your family from the loss of your spouse’s income or in-home support. Ex-spouses may also have an insurable interest in their former partner if that partner is paying child or spousal support.

You can also take out life insurance coverage on your children. In this case, the life insurance policy can act as an investment vehicle to save for your child’s future – to fund a university education or a downpayment for their first home.

Universal life insurance plans include a cash value element which grows over time so the earlier you purchase a plan, the more time it has to accumulate value. When your child becomes an adult, policy ownership can be transferred to them, and they can use the cash value or borrow against it for whatever they need.

Business partnerships

Starting a business can be a large financial investment. If you launch your company alongside a business partner, the value and success of your venture is intertwined.

If your business partner dies, you could suffer serious financial hardships. For this reason, business partners often take out life insurance policies on one another. This acts as a buffer if one partner passes away and the other is left to carry the entire financial burden of the business.

Alternatively, a policy death benefit can be used to fund a buy and sell agreement between partners. If one partner dies, their share of the business can be purchased by the other partner using funds from the death benefit payout. 

Estate planning

You may have already purchased a whole life insurance policy for yourself as part of your estate planning portfolio. Additional policies for family members can provide an extra layer of protection in terms of ensuring that your family’s hard-earned wealth is passed on to the people you love.

Life insurance offers liquidity and tax efficiency in the event of a death in the family, meaning that when an insured person passes away, policyholders have peace of mind in knowing that their assets are protected and funds are available to provide for their immediate needs.

Rules and requirements for taking out a life insurance policy on someone else

To take out a life insurance policy on another person, strict rules need to be followed to guarantee that everyone’s interests and privacy are protected. Here’s what you’ll need to consider:

Proof of insurable interest

The documents you provide to prove insurable interest represent the level of financial dependence you have on the insured person. When it comes to family, these could include documentation that proves your relationship, such as marriage or birth certificates or other official papers that indicate family ties or guardianship.

Additional proof may be required if the insured is not a member of your immediate family. For example, your insurance provider might ask for tax returns or bank statements that offer evidence of potential financial loss should the insured die.

For business partners, insurance providers can ask for documents related to the establishment of the venture. Be prepared to share financial statements, legal and business agreements, contracts, incorporation documents and a plan for the future of the business should one partner pass away. 

Consent and medical underwriting

Whether you’re taking out a life insurance policy on your spouse or your business partner, you’ll need to obtain that person’s consent. Their permission will also need to be documented on the policy application, and they might need to agree to a medical assessment to qualify for coverage depending on their age and the type of policy you choose.

Coverage limits

This is another instance where real life dramatically diverges from Hollywood – you can’t take out a multi-million-dollar life insurance policy on someone if that doesn’t line up with their earnings.

Insurance providers typically have a cap on policy size that relates directly to the insured person’s income. Often that’s 25 times the annual income of the insured, though it also depends on the age of the person you want to take a policy out on. The amount of coverage must be proportional to the financial loss that would result from the insured person’s death.

Policy ownership and beneficiaries

When you take out a life insurance policy on someone else, you are the policyholder, and you choose the beneficiary. However, the insured must be informed about who that beneficiary is.

Risks and challenges of taking out a policy on someone else

Life insurance can be a difficult topic to tackle — and it demands extra care and sensitivity when you’re taking out a policy on someone else. Potential policyholders should be aware of the following challenges:

Relationship strain

Transparency is key when navigating conversations about life insurance. If you’re taking out a policy on a family member or business partner, it’s important to have conversations at every stage of the process so that you can avoid tension, misunderstandings, or mistrust. 

Financial burden

Life insurance policies require consistent, long term premium payments. For that reason, planning and budgeting for the costs play a big role in deciding if taking out an additional policy is the right choice for you.

If you already have your own policy, you’ll need to be able to manage those premium payments on top of the premium payments on the policy you take out on your spouse, family member, or business partner.

Tax implications

Death benefit payouts are often protected from taxation; however, your policy provider can advise you on whether this is the case for the policy you want to take out in the jurisdiction in which you reside.

Policy lapse

To maintain coverage, premium payments must be made regularly according to the schedule agreed upon in your policy application (typically monthly or annually). Failure to make your payments could lead to a lapse in your policy and a loss of coverage.

Alternatives to taking out a policy on someone else

There are options to consider other than taking out a life insurance policy on someone else. These alternatives also offer robust financial security for your family and your future.

Joint life insurance policy

This type of policy is an excellent option for spouses or common-law couples and can be structured two different ways: joint-first-to-die or joint-last-to-die. These streamlined plans cover two lives concurrently and pay out a death benefit according to your preference: either when the first spouse passes away or when both have passed away. Typically, this decision is informed by your choice of beneficiary.

Group life insurance

As an employer, you might choose to offer group life insurance to everyone in the organization. This reduces the need for individual policies and ensures that everyone in the company, including a business partner, is covered (and may also have the option to buy additional coverage for themselves or for their partner at their own cost).

Trusts and estate planning tools

When it comes to protecting yourself and the people you love most, strategic estate planning can take the place of additional life insurance policies. Often, your own life insurance plan can offer the security you desire. Universal life insurance policies include a cash value component (one that accumulates and can be reinvested in the plan) in addition to the death benefit payout received by your beneficiaries.

These plans can be used in different ways as a vehicle for growing and protecting your wealth. You might also choose to create a trust, an option that transfers your assets to the trustee you select while avoiding probate and, under certain conditions, taxation.

Protect the people who matter with RBC Insurance

You can take out a life insurance policy on someone else, however, you must be able to demonstrate that you have an insurable interest in the insured person. Conversations about life insurance need to be honest and transparent and should prioritize a careful consideration of the legal and ethical implications involved.

If you have any questions or concerns, an RBC Insurance advisor is available to offer answers and help you explore your options.

FAQs on taking out life insurance for someone else in Canada

Can someone take out life insurance on me without me knowing? 

No. For someone to take out a life insurance policy in which you are the person who is insured, they must obtain your consent and participation in the application process.

Is it illegal to get life insurance on someone else without their permission? 

It won’t be legally feasible to take out a life insurance policy on someone without their permission. Doing so would be considered fraud and wouldn’t be eligible for pay out by the insurance company. 

Can I take a life insurance policy out on someone I don’t know?

No, the insured person must have knowledge of the policy and give their consent to it. In addition to their consent, you must prove insurable interest in the insured – this means providing evidence that their death would cause you financial hardship.

Can I take a life insurance policy out on my ex-spouse?

In some cases, ex-spouses will have an insurable interest in their former partner. For example, when one person is paying child or spousal support, the recipient of those payments might be able to demonstrate an insurable interest. Like with any policy, however, consent from an ex-spouse is required.

Can I take a life insurance policy out on one or both of my parents?

You may be able to demonstrate insurable interest in one or both of your parents if you can provide proof that their deaths will impact you financially. For example, if they have debts or other expenses that would transfer to you at the time of their passing. Additionally, you will need your parents’ consent to take out the policy.

Can I take a life insurance policy out on one or both of my grand parents?

Like with parents, if you can demonstrate insurable interest in one or both of your grand parents, you may be able to take out a life insurance policy on them. You must provide proof that their deaths will impact you financially and you will need your grand parents’ consent to take out the policy.

Can I take a life insurance policy out on one of my siblings?

If there is a situation in which you have insurable interest in one of your siblings (for example, if they are the caregiver for your parents) then, with their consent, you may be able to take out a life insurance policy on that sibling.

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