Can anyone take out a life insurance policy on me?
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UPDATED: Jun 28, 2022
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- There is a simple answer to the question of who can take out a life insurance policy on you.
- Life insurance is based on a concept called “insurable interest.” Only someone with an insurable interest in your life will be allowed to take out a life insurance policy on you.
- If you are over 16 years old, no one can take out insurance on your life without your knowledge.
- If you are younger than 16, only a parent or grandparent can insure your life. Federal law dictates that they must themselves have life insurance, and the insurance on your life cannot be more than 50 percent of their amount.
Who can take out a life insurance policy on your life?
Only someone with an insurable interest in your life would be allowed to take out a life insurance policy on you.
At the root of insurable interest is the idea that if sudden death were to strike a family, an organization, or a business, a financial “loss” would result.
When someone dies suddenly, often a family experiences many different levels of loss. An insurance policy, however, can only compensate for the financial element of a loss.
To determine who could be eligible to take out a policy on your life, ask yourself the following questions:
- Who would experience a financial hardship if you were to pass away unexpectedly?
- Who might experience a loss of housing security if you were to depart?
- Is anyone depending on your future income to pay for a college education?
- Are you in a business partnership? Without the financial assist from an insurance policy, could your partner(s) smoothly recover from your sudden absence and keep the business running?
- Do a disabled adult or aged parents depend on your income each month?
- Do you carry a lot of debt, for example loans on more than one car or a hefty mortgage, that would be left to someone else to settle if you were gone?
- Does your family have enough liquid assets to pay your final expenses?
Only the people with these types of vulnerabilities can be said to have an insurable interest in your life.
As an American adult, to be insured you will have to make an application to a life insurance company.
Primary for that company is the matter of your physical health and fitness. With few exceptions, before an insurance company makes an offer to insure your life, you will have to prove your “insurability.”
- How old are you?
- Are you in good health?
- Are you a smoker?
- Do you have a persistent medical condition of any kind?
The person who will be insured must also be of “good character.” If that’s you, in insurance terms it means that you are not a known risk taker. Your legal, medical, and driving records will all be scrutinized by the insurance company. Insurance companies are allergic to risk.
- Have you ever been cited for drunk driving?
- Have you had your driver’s license suspended?
- Do you jump out of airplanes or scale mountains for fun?
All these factors will play into an insurance company’s decision to insure you. None of this can go on without your knowledge.
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Who Should Own The Policy?
Most adults own their own life insurance policy or, because the purpose of the policy is family-focused financial or estate planning, they make their spouse the owner. Many people insist on owning their own policy out of fear and perhaps ignorance.
Perhaps they have seen too many crime thrillers.It is true that the insurance contract is between the insurance company and the owner so that the owner controls all substantive decisions about the policy and can make changes to it at will.
The owner also will decide how the proceeds are to be paid out if or when they are ever needed.
But not so fast. Unless there is some reason for suspicion, the question of who should own the policy should be a family business decision – and it might come down to the issue of taxes.
Tax Issues: Important to Know
If you are the designated owner of the life insurance policy on your own life, when you die that policy will become part of your taxable estate.
On the other hand, if someone else owns the policy, like a spouse or heir, the policy is not considered part of your estate, and proceeds will go to the beneficiaries tax-free.
A further alternative is to create a trust and transfer ownership of the life insurance policy to the trust. This is viable only if the size of your estate is less than $5,490,000 in 2017. There is also such thing as an “irrevocable life insurance trust.”
In most cases, transferring assets to a trust must be done three years or more before your death for the IRS to separate them from the estate for tax purposes. This is a topic for consultation with your tax professional.
Life Insurance is Just Another Tool in the Financial Toolbox
If you fully understand life insurance, you will think of it as just one of many financial tools available to hedge against future risks for you and your family. Thus, its uses can be discussed openly, and decisions to use or not it will be strategic decisions, not emotional ones, just like the rest of your family’s finances.
No one should have the incentive to take out a “secret” life insurance policy, and life insurance companies make this virtually impossible today.
Because of many layers of federal and state fraud and anti-money laundering regulation, life insurance companies are required by law to verify the identity of every person with whom they do business.
And by law, no life insurance company can write a policy on a person over 16 years of age without their knowledge and consent.
But is worth the time to learn about the many different types of life insurance, the flexibility built into tax-advantaged whole life products, and the many ways it is used by individuals and companies to build, and secure, assets, lifestyle, and financial independence.
Insurance is universally considered one of the pillars of a financial plan, and a defensive strategy. Its job is to protect. Your income, assets, debt, and future earning potential.
A licensed life insurance advisor can help you analyze what insurance-based strategy might provide the best suite of solutions for you and your family.
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