The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: reverend on August 24, 2012, 10:46:07 PM
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I just thought of this when reading the other insurance thread and I know some companies have policies on (some) employees.
Can I take out a life insurance policy on my girlfriend? What about a neighbor or a coworker or random person on the street?
Why or why not?
Of course, if I took out an insurance policy on the GF and suddenly she dies, that would make me very suspect. That's like insuring a house and then it burns down. Hmm.
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Yes, you can take out a life insurance policy on someone else, but it has to be someone upon whom you're "financially dependent." For instance, girlfriend, wife, business partner, etc. Life insurance is intended to be insurance, not a way to speculatively invest. Even if it weren't regulated that way, no insurance company would sell you a policy on someone you're not financially dependent on, since there's no reason you'd buy it unless you knew something they didn't. Also, historically there was a lot of murder involved with this concept.
On the other hand -- you can purchase a life insurance that someone else has taken out. So, for example a terminally ill man with no family can sell his life insurance policy to you, you pay the premiums till he dies, then you collect the payout when he dies. There are even investment funds that pool purchased life insurance policies. They took an absolute bath when people stopped dying from AIDS in this country.
There was a pretty interesting article in the NYTimes about this last week. http://www.nytimes.com/2012/08/12/magazine/are-you-worth-more-dead-than-alive.html?pagewanted=all
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Good post Stets, thanks for the info.
I've looked into purchasing life insurance for people I've done joint venture real estate projects with.
Put a clause in the agreement that if someone dies in the project, the other person can buy out their part for whatever amount, then take out life insurance policies such that the other partner can afford it.. helps relieve the "what if I get 'stuck' worry."
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If you wanted to google about this I think the key term is that you have to have an "insurable interest", meaning that you have a legitimate reason to take out insurance on that person. The "key man" policies you described that companies take out on employees pass that test (although I think for some companies that take them out on *everybody* it gets a bit suspect, and creepy...).
I don't know if you need to be financially dependent on the person necessarily--you can take them out on your kids when they're young for example (not that I'd recommend this). You just need a reasonable explanation as to how it makes sense that you'd need insurance on that person. I think girlfriends/boyfriends would likely be OK in most cases, particularly if you're shacking up.
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Life insurance companies require that you demonstrate insurable interest before buying a life insurance policy. The kind of life insurance you're referring to is called key persons life insurance, which allows companies to buy policies on their business partners or star employees in order to ensure smooth functioning of the business if anything happened to the partner/employee. There are several other arrangements where life insurance [MOD EDIT: Link removed.] plays a big part in a non blood-related scenario. One example is surrogate mothers, who buy additional life insurance on themselves, accept payments from the intended mother and father and lists them as beneficiaries for part of the payout in the interest of their investment, both emotional and financial, in surrogacy.
Pat Cassidy
Disclaimer: I work for AccuQuote and this is my personal opinion.
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There was a long story on This American Life about this very topic. The summary is that a life insurance salesman made many millions of dollars by buying variable annuities on terminally ill people, until the industry got wise and cracked down.
An interesting listen. The relevant portion starts after the intro piece about suicide by murder, as part of an overall episode theme about loopholes: http://www.thisamericanlife.org/radio-archives/episode/473/loopholes?act=1#play