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Taking out insurance on someone else’s life might sound a bit macabre. But this is not about secretly taking a bet that someone is going to die soon. Insurers won’t let you take out a policy on a stranger.

In South Africa, it is possible to take out a life policy on someone else, provided you can show that you have what’s called an “insurable interest”. What that means, essentially, is that you must be able to show that you would suffer financial consequences, or loss, if they were to pass away.

An obvious example would be if you took out a policy on your spouse. If they were to pass away, you would lose access to their income, and that is an “insurable interest”. If you are dependent on an ex-partner for maintenance, that would also be relevant.

You may also want to take out a policy on the life of a parent if they are supporting you financially in some way. It may even be possible to make an argument that if your parent were to pass away you would be liable to pay estate duties for which they don’t have liquid assets. An insurer may also consider that an “insurable interest”.

Another example would be if you have a sibling that is looking after your elderly parents. You may also want to insure their life because if they passed away, somebody would have to be paid to be a caretaker.

Thinking ahead

Something that most people don’t want to think about, but may be worth considering, is taking out a life policy on your child. The main reason for doing this is not so much because of any financial implications if they were to pass away. It is more to ensure that if your child develops any health conditions at any later stage, they will always be covered. If they try to get insurance only after they are diagnosed, they may be excluded from claiming for that condition, or not be able to get insurance at all.

Another common practice is for someone to take out a life policy on a business partner or even a key employee. There would be a demonstrable financial implication if they passed away, and so that is insurable.

Deciding on what counts as an “insurable interest” may differ from one insurer to the next. So, it’s important to understand what different companies will accept.

Some, for example, may allow you to take out a policy on any close family member’s life just on the basis that there is a bond of love and trust between you, and you will suffer a loss if they were to pass away. Others, however, will insist on there being a financial interest.

Three things to consider

There are also a few crucial considerations when taking out a policy of this nature:

1. You have to get the consent of the person whose life you are insuring. They will need to answer all the underwriting questions and undergo any medical tests required. You can’t even take out a policy on your spouse without them knowing about it.

2. Both you and the person whose life is insured must follow the rules of the policy. If you are found to have been involved in criminal activity for instance, you probably won’t be paid out.

3. With some policies, the person you have insured can still choose for themselves who the beneficiaries are. Even if you are paying the premiums, they could theoretically decide not to put you as a beneficiary. So be sure that you have a clear contractual understanding beforehand where everyone understands their responsibilities.

To discuss your life insurance needs, speak to a professional.