Life insurance is meant to provide a safety net for those who depend on another person financially. If that person were to die, life insurance can pay out benefits that cover end-of-life expenses like a funeral, as well as ongoing expenses such as a mortgage or tuition, so their loved ones aren’t burdened by the costs.
If you want to purchase a life insurance policy for someone else, you have to accomplish two things. First, you must prove to the insurance company that you would face a significant financial hardship in the event the insured person dies. Second, you have to get consent from the insured person to take out a policy on their life.
So while it’s certainly possible to take out life insurance on someone else, it can’t be just anyone. Here’s a closer look at how life insurance works and who qualifies to be insured.
How life insurance policies work
A life insurance policy is a contract between a life insurance company and policy owner, according to Joshua Police, executive vice president at Boston Mutual Life Insurance. “The policy owner pays a premium, which is the cost of the insurance, in exchange for a death benefit,” he says. The death benefit is the money that gets paid to the policy’s named beneficiaries if the insured dies.
Generally, there are three parties involved in a life insurance policy:
- Policyholder: This person owns the policy and is responsible for making premium payments to the life insurance company. They have the power to make changes to the policy, including adjusting the coverage, changing beneficiaries, and surrendering or selling the policy.
- Insured: This is the individual whose life is covered under the contract. If this person dies while the policy is active, the death benefit is paid out. It’s common for the policyholder and the insured to be the same person, but it’s not required.
- Beneficiary: This is the person (or people) who receive the death benefit after the insured person…