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Could You Buy Life Insurance For Those You Love…With You As The Beneficiary?

Is that even legal? Ethical? Moral? I mean, the person you would be buying the life insurance for would know you were doing it, so what would be wrong with it? I imagine it would take some heavy lifting mathematically to figure out your investment in the policy and your payout should the person die versus just investing the money yourself in the market or some other vessel, but still…I wonder if it would work. I wonder if it is being done by anyone. Whether paying the “client” under the table on a monthly basis or paying the policy outright, the idea fascinates me.

I mean, I could go buy a policy on my life and name anyone I wanted as a beneficiary – so why couldn’t it work in reverse? Let’s say I bought a policy on a parent and named myself as beneficiary – how is that any different than the first scenario? If one did the math and decided that was a good way to “set aside” $X.XX per month, would there be any problems with any regulatory agencies?

Basically you would be gambling on the futures of people you know by purchasing term life insurance on them. I wonder…What do you guys think? Also, How much life insurance should you buy if you can?

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Comments (16)

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  1. JK says:

    I used to work for an insurance company a million years ago so I have some knowledge. For your scenario, the most common (non-evil) reason for the insurance purchase would be to cover yourself if that person’s death would cause you a financial hardship. Funeral expenses or loss of income–that kind of thing. We’re talking about something between #10k-100k, not a million dollar policy.

  2. Katharine says:

    My parents bought whole life insurance on me with themselves as the beneficiaries – and then when I got a real job, they decided that I need to pay it. Uncool.

  3. This is done all the time. Parents routinely get snookered into buying insurance on their children (presumably to pay for funeral cost in the event of an untimely death). I doubt very much that it would be cost effective, however, to buy it on your parents unless you know something that the insurance policy physical and actuarial isn’t going to find out.

    A better question here is whether it’s unethical to insure someone that you _don’t_ love. Should a boss be able to insure against her employees, for example?

  4. Grant says:

    @Katharine

    Are you saying you have to pay the premiums on a policy on your life with your parents as the beneficiary?

    I’d tell them thanks, but no thanks. Betting on your kids to die is one thing, making them pay the ante is completely not okay.

  5. Ron says:

    Bosses already insure against the deaths of employees — it’s called Key Man Insurance and given the incredible cost of replacing an employee (average is 2x annual salary), it makes good sense.

    I had a friend who’s child died and he didn’t have insurance. You only need to see that happen once to realize that a small policy on kids is a good idea for the sanity of a grieving parent. Most parents can’t afford to take a few weeks off work, pay for a funeral ($6,000 to $10,000), pay for counseling, and settle final medical bills and deductibles.

    I have $20,000 whole life policies on each of my three kids that cost $6/month each. Why did I buy whole life rather than term? The two oldest ones paid up when they were 12 and I have that policy for the rest of their lives and pay nothing more on them. My youngest’s policy will pay up in two years when he turns 12.

    That’s the beauty of getting whole life insurance when they’re only infants. I paid in $864, but I have the (and eventually THEY) will have that $20,000 policy for the rest of their lives … with nothing more to pay.

  6. Edwin says:

    Expanding on what Ron said, companies actually take out insurance policies on all employees, not just “key” ones and it’s been nicknamed dead peasant insurance.

    I’ve actually seen the topic discussed on a few investigative journalism TV shows and in Michael Moore’s most recent movie. There seems to be no legal issue with it although I heartily disapprove.

    If you want to find out more just Google “life insurance on employees”.

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  8. Ken says:

    I have a whole life insurance policy on my dad. It has 10K face value. He knows I’m paying the premium and I am the beneficiary on the account. I do wonder if the premium is worth it. Anyone got words of wisdom for me?

  9. Evan says:

    I think the term everyone is hinting at is the term insurable interest. Parent-Child / Employer-Employee / etc.

  10. Sam says:

    I have my kid as a rider on my life ins. That way if he dies all expenses for my nervous break down or loony bin stay are covered (I’m not joking- I adore the boy & if anything ever happened to him I’d have a breakdown).

    I know people who have had kid’s die & they couldn’t even scrape the $ to bury them let alone cover end of life services & such.
    I think people should have a puny 5k policy on any relative they are financially responsible for just in case.
    Last summer a single/no kids guy i know drowned. He had to insurance or anything. His family is in a real bind over the various expenses.

    My son’s grandmother (Dad’s side) has a small 5 or 10k policy on all her unmarried kids so if anything happens she at least knows she can bury them.

    As far as taking policies out on peopel you don’t care about… I think it’s a little unethical unless there’s a family tie that could financially negatively affect you.
    I wish my son’s Dad would let me take out 20k on him just in case – since I would no longer get child support & SS wouldn’t be much (he’s a real bad driver). If there’s a way to take out a policy without their permission let me know … it’d help me sleep better @ night.

  11. David says:

    That’s a bargain Ron, will have to remember that if/when I have kids :)

  12. Mitzi says:

    My husband and I are in the process of burying my 27 year old step-son. It’s very expensive and this has set me to thinking I need to buy insurance on my grown children and grandchildren who have no life insurance coverage. I have 3 grown children, two of which have no life insurance. I have 6 grandkids, 3 of which have no insurance. I want to buy a $10k policy of each of them and one on my husband and I. I have a large life insurance policy on myself already, but that money is to go to my husband and the family to help them financially after I’m gone. I want to buy a 10k policy just to cover my funeral expenses. I’m wondering the best type of insurance to buy, the best place to buy it and how much I can expect to pay for these policies. Please anyone, please email me if you have any knowledge. mitzi.m@suddenlinkmail.com

  13. Ron says:

    David, I bet you’d be an unbelievable, fantastic, loving father. Any kid would be fortunate to call you “Dad.”

  14. David says:

    Thanks Ron. I actually did need to hear that today, so good timing. :)

  15. Jennifer says:

    Ron,
    I couldn’t find anything like that when mine were babies.
    What company offers that? Or do they no longer offer it?

  16. wow reading some interesting stuff here. I think it makes total sense for comapnies to take insurance against their employees as it can be quite expensive to replace a lost employee. I guess it will be allright to take life insurance on someone with you as the beneficiary if the person’s passing away could bring financial burden on you. As some have mentioned, someone dying might bring financial burdens such as funeral and counselling costs so it is only fair to let insurance pay for those costs. My question though is how does this work? Will the insurance company require the person you are taking the insurance on to undergo medicals?

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