Life insurance provides financial protection to loved ones in the event of a person's death. It is commonly known that individuals can purchase life insurance policies for themselves, but what about taking out a life insurance policy for someone else? Fred Wagenvoorde, financial planner at Fiscal Private Client Services unpacks the topic.

While it is possible to take out a life insurance policy on someone else’s life, you can only do so with their consent. Life insurance involves personal and private information, and the insured should have the opportunity to provide accurate details and make informed decisions about the coverage.

Policy holder vs the insured

The person who takes out the policy is called the policyholder, while the individual on whom the policy is taken is referred to as the insured. The policyholder pays the premiums, which are the regular payments required to maintain the policy and, has the freedom to nominate any beneficiary they choose.

Unpacking insurable interest

Insurable interest is the financial interest that the policyholder has in the insured person. It exists to prevent the misuse of life insurance for speculative purposes. This can be proven by demonstrating that the policyholder would suffer a financial loss if the insured person were to pass away. For example, a parent may take out a policy on their child to cover funeral costs. This demonstrates insurable interest by showing that they would face financial hardship if their child were to die, and they do not have the capital to cover a funeral.  If there is no insurable interest, it is not possible to take out a life insurance policy on someone else. However, there are other ways to cover family members.

Covering family members

In this example, a family member who is older than 18 years of age, can take out their own policy and name a beneficiary, such as a parent or spouse, to receive the death benefit. It is possible to recover the premium from a family member, but this will be considered a donation and will be exempt from donations tax up to the first R100,000 in any tax year (i.e., March to February).

Steps to insure a life

The process of taking out a life insurance policy on someone else’s is similar to taking out a policy for oneself. The policyholder would need to provide information about the insured, such as their age, health, and lifestyle habits. They would also need to complete an application and may be required to undergo a medical examination.

Taking out life insurance for someone else can potentially be open to fraud if someone tries to manipulate the process for personal gain. To prevent fraud, insurance companies have strict procedures in place. They require the insured person's consent and typically conduct thorough underwriting processes, including medical exams, to assess the risk accurately. Insurance companies also have mechanisms to investigate suspicious claims and prevent fraudulent activities.

Tips when taking out a life insurance policy for someone else

1. Ensure you have a valid and demonstrable insurable interest in the insured person to meet the requirements set by insurance companies.

2. Discuss your intentions openly with the person you want to insure and obtain their consent and cooperation throughout the process.

3. Research and compare different insurance companies to find the policy that best suits your needs and budget.

4. Be honest and provide accurate information about the insured person's health and lifestyle habits to avoid any complications or claim denials in the future.

5. Consider seeking professional advice from a financial advisor or insurance agent who can guide you through the process and help you make informed decisions.

So while it is possible to take out a life insurance policy on someone else’s life make sure that you have a valid insurable interest in that person. Insurable interest is the financial loss you would experience if the insured person were to pass away. Taking out life insurance on someone else’s life requires careful consideration, honesty, and adherence to legal and ethical guidelines. By following the necessary steps and seeking professional advice, you can protect the financial well-being of your loved ones and provide peace of mind in the face of life's uncertainties.

For more see: www.fiscal.co.za