Can You Take Out Life Insurance on Just Anyone?

Couple signing a document — Typically people take out life insurance on their spouse, but it could just as easily be a business partner, say. Moyo Studio/E+/Getty Images

No, you can't take out a life insurance policy on just anybody, and there's a good reason why. If you could take out a life insurance policy on anyone without their consent, then you would, in the words of U.S. Supreme Court Justice Oliver Wendell Holmes, have a "sinister counter interest in having the life come to an end."

By law, not only do you need a person's written consent to take out a life insurance policy on them, but you also need to prove that you have what's called an "insurable interest" in the individual. You need to prove that you would suffer financially because of their death.

"Insurable interest comes down to that fundamental concept of life insurance — reliance on income," says Jack Dolan, vice president of public affairs at the American Council of Life Insurers (ACLI). "To buy life insurance on another person, you must rely on them for income. And that covers a wide gamut of human relationships: spouses, friends, business partners, charitable donors, debtors and more."

Betting on Death

The concept of insurable interest was born in 18th-century England thanks to a morbid type of wager popular in English newspapers. People actually would bet on when public figures were going to die. The pope, the king, the archbishop of Canterbury — everyone was fair game. The bet was made by buying a life insurance policy on the person and collecting upon their death.

Parliament put an end to the unsavory practice with the Life Assurance Act of 1774, which introduced a new legal requirement for life insurance policies:

"[N]o insurance shall be made by any person ... on the life or lives of any person ... wherein the person or persons for whose use, benefit or on whose account such policy or policies shall be made, shall have no interest."

People for Whom You Can Buy Life Insurance

It's relatively common for a husband or wife to buy a life insurance policy on their spouse, especially if one spouse is a stay-at-home parent. In that case, the breadwinner pays for the policy, which would help cover expenses like child care if the stay-at-home spouse died.

Another common situation is to buy a life insurance policy for a business partner. In that case, you have a clear financial interest in them remaining alive. But if they were to die unexpectedly, you would rely on the death benefit to keep the business afloat.

Dolan says that charitable institutions and nonprofit organizations might even take out life insurance policies on generous donors.

"If they are receiving regular payments from an individual, they might consider taking out a policy on that person or a group of people." says Dolan. "It must be done with consent, though."

According to Policy Genius, not only do third parties need to consent to a life insurance policy in their name, but they have to actively participate in the application process, which usually includes a medical exam.

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