There are a lot of questions about the details and requirements when attempting to buy life insurance for someone else. You can buy policies on other people, but certain situations will result in approval. Not every application for life insurance on another person is approved by savvy insurance companies.
These policies on other people make sense in many cases for both personal and business reasons. With all the helpful applications of life insurance, it’s no wonder that people in plenty of circumstances find it useful—and even necessary—to take out policies on those other than themselves.
Consider the following situations in both personal life and business realms that might be approved by insurance companies. You’ll learn the ins and outs of buying life insurance for someone else within your unique circumstances.
Personal Reasons for Buying Another’s Life Insurance
Many possibilities exist for buying life insurance on those closest and related to you, but life insurance companies won’t approve the purchase of insurance on a stranger. This is called STOLI (short for “stranger-owned life insurance”) which means that there’s not a clear insurable interest, making it fall from the criteria for approval.
Insurable interest is, however, obvious in other circumstances such as when a couple has dependents, parents, or grandchildren that need to be insured. As a family, it’s clear why insurance would be an understandable and wise precaution.
Couples of all kinds frequently buy life insurance for each other—married or not. Still, it often makes more sense for each spouse to own their policy because of tax issues that can arise from assigning a third person as a beneficiary. Because tax rules shift with a third party to the policy, this is a big potential concern to the ultimate value of the policy serving its protective, valuable purpose.
For Parents or Grandparents
It’s rather common for policies to be taken out on grandchildren and children because permanent policies lock in the child’s premium at an extremely early age, making it a smart choice to save on rates. Beyond that, cash value with such permanent policies promises to help the child later in life when it makes sense to collect interest, save, and perhaps even borrow against the tax-deferred accrual.
For Sick Relatives
In general, life insurance is best purchased while a person is in good health and at a younger age. There are good reasons for this. For one, it’s never determined when a loss will come, and being insured helps everyone named in the policy that sits close to the deceased. Second, insurance costs considerably less when there is a low probability of activating policy payouts due to youth and health.
Business Applications of Life Insurance for Other People
Primarily, business reasons for buying a policy on another person involves buy-sell agreements, executive benefits, and what’s called a “key man” policy. Like all life insurance, policies taken out for agreements, benefits, or other reasons serve a protective function. Jump into some of these motivations and applications.
For Buy-Sell Agreements
Partners and co-owners of a business can agree that after the death or disability of either party, the affected person will sell their part of the business for a set amount. This is called a buy-sell agreement. But, since the amount can be astronomical to buy, it doesn’t always stand to reason to buy it outright. So, that’s why life insurance can pay heirs and disabilities can be mitigated after an accident or illness.
For Executive Benefits
Star employees can get life insurance policies from their employer to help with retirement earnings and providing for their family after the loss of the insured. There are certain restrictions on these policies, but insurance companies do grant them against criteria and individual factors. Similar packages, such as 401k plans, are well-known, and life insurance is another potential employment perk.
For “Key” People
Businesses are run by several people. Each plays a different role, but some are practically irreplaceable and key to business success. If they were to become deceased, the business itself (just like those around them) would suffer a devastating blow while trying to find a new executive, leader, or contributor. “Key-man” policies are designed to help with this risk.
In addition to covering the person, these policies can help protect from bearing a huge business loan. The policy is simply assigned to the lender of the loan (or bank), and if the insured passes away during the term, the benefiting institution will take the proceeds to cover the debt. Such a policy can save a business from a fatal financial blow after the loss of an owner.
Explore Policies for Others with Sproutt
You might have personal as well as business reasons for wanting to learn more about life insurance for other people. Sproutt, a leading online broker of life insurance, can help you find the right life insurance policy to protect yourself (or your business) from the financial impacts that come from losing someone.