Life insurance is a necessity for virtually everyone. We purchase life insurance to protect the ones we love if we were no longer there – to help pay for final and funeral expenses, to help serve as income replacement and mortgage protection, or to help pay for other costs that result because of a death..
A person or entity has an insurable interest in an item, event or action when the damage or loss of the object would cause a financial loss or other hardships.
Naturally, spouses purchase life insurance because if one were to die, the other would be impacted financially. Parents often buy life insurance on their children to pay for their final and funeral expenses.
But you may be wondering if you could buy life insurance on someone who is not a spouse or a child – someone in your extended family. Is it possible?
“A person or entity has an insurable interest in an item, event or action when the damage or loss of the object would cause a financial loss or other hardships.”1
Investopedia.com goes on to state that insurable interest makes issuing a policy legal and protects “against intentionally harmful acts.” In other words, someone could only buy a life insurance policy on someone in his/her extended family if the death of that individual would have a negative financial impact on the buyer. State law determines whether a person has an insurable interest.
NerdWallet notes that buying a policy on someone else “makes good sense in some situations.”2 NerdWallet also notes that whether you can buy the policy depends on what kind of relationship you have with the other person and that you need that person’s consent to buy the policy on him or her – no secret policies allowed!
Some examples of when you may want to consider purchasing life insurance for an extended family member include:
- If one of your parents takes care of the other, and caregiving would fall to you if your caregiving parent died;
- If you have been named guardian of a sibling’s children in the event of their death;
- If you have been named guardian of grandchildren in the event of your children’s death
If you want to know which situations would warrant purchasing a life insurance policy on an extended family member, contact a financial advisor. If you have any questions about life insurance, contact an independent broker or a licensed insurance agent.