You can take out a life insurance policy on someone else, but only if you can prove a financial stake in that person’s life, get their written consent, and clear the insurer’s underwriting. The application itself is straightforward. The harder part is setting up ownership and beneficiary designations so the death benefit isn’t quietly converted into a taxable event by the IRS.
Prove You Have Insurable Interest
Before any insurer will issue a policy, you have to show insurable interest, meaning you’d suffer a genuine financial loss if the insured died. The rule exists to keep life insurance from functioning as a wager on a stranger’s death, and every state enforces some version of it.
Two categories qualify. The first is close family: spouses, parents and children, and in many states siblings or grandparents. These relationships carry a presumed insurable interest, so you don’t need to attach a dollar figure to the loss. The second is economic: business partners, employers and key employees, creditors and debtors. For economic relationships, you’ll typically need to show a concrete financial exposure that the person’s death would create.
One useful detail: in most states, insurable interest only has to exist when the policy is issued, not for its whole life. If you insure a spouse and later divorce, you can generally keep the policy and collect the benefit. The same holds after a business partnership dissolves. A minority of states apply a stricter ongoing-interest rule in certain situations.
Get the Insured’s Written Consent
You cannot secretly buy life insurance on another adult. Every state requires the insured’s knowledge and consent, and a policy issued without it is void from the start. The person being insured has to sign the application, acknowledge the face amount, and know who the beneficiary is.
Their involvement doesn’t stop there. They’ll answer medical history questions, authorize release of records, and in many cases sit for a paramedical exam or a phone interview. Some insurers run a verification call afterward to confirm the insured actually agreed to the coverage and understands its terms.
Children are the exception to the signature requirement. A parent or legal guardian provides consent for a minor, and insurers cap coverage at amounts that bear a reasonable relationship to the family’s finances. A request for $1 million on a child when the parents carry no coverage of their own will not clear underwriting.
Apply and Justify the Coverage Amount
The application collects detailed information about both you (the owner) and the insured: names, dates of birth, Social Security numbers, employment, and income. The insured’s medical picture is the centerpiece, including past diagnoses, current medications, family history, tobacco use, and high-risk activities.
For larger policies, underwriters compare the requested death benefit to the insured’s financial value using age-based income multipliers as a rough guide. A 35-year-old earning $100,000 might qualify for 25 to 30 times income. A 62-year-old at the same salary might top out closer to 10 times. If what you’re asking for exceeds those ranges, expect the insurer to either trim the face amount or request supporting documents like tax returns, loan paperwork, or a buy-sell agreement showing why the number is justified.
This step is where the insurer guards against over-insurance. A policy that would pay out far more than the owner stands to lose creates a bad incentive, and underwriters are trained to catch it.
How Underwriting Works
Once the application is in, the underwriting team evaluates the risk of insuring the proposed insured. A fully underwritten policy pulls medical records, checks prescription drug databases, and queries the Medical Information Bureau, a shared insurer database that flags prior applications and reported conditions.1Federal Trade Commission. Medical Information Bureau Larger policies usually require a paramedical exam with blood work, a urine sample, and vital signs.
Non-health factors feed into pricing too. Occupation, hobbies, and international travel patterns all affect premiums and sometimes eligibility. If the risk is too high for standard coverage, the insurer may offer a rated policy at higher premiums, attach exclusions for specific causes of death, or decline the application altogether.
Accelerated Underwriting
Many carriers now offer accelerated underwriting that skips the physical exam and relies on data analytics, prescription records, and electronic health files. It’s generally available to applicants under 60 in good health who want $1 million to $3 million of coverage, and decisions can come in 24 to 48 hours. If the algorithms flag something, the file bumps back to traditional underwriting with a full exam.
Decide Who Owns, Who’s Insured, and Who Collects
A life insurance policy has three roles: the owner, the insured, and the beneficiary. Getting that structure wrong is the single most common source of unexpected tax bills in life insurance planning. The owner controls everything, including the power to change beneficiaries, borrow against cash value, surrender the policy, or assign it, and that control carries tax consequences.
For family coverage, one spouse often owns a policy on the other and names themselves or the children as beneficiaries. In a business context, the company usually owns and is the beneficiary of policies on key employees or partners, using the proceeds to absorb the loss or to fund a buy-sell agreement.
The structure also drives estate tax. If the insured held any “incidents of ownership” at death, the entire death benefit is pulled into their taxable estate.2Office of the Law Revision Counsel. 26 U.S. Code 2042 – Proceeds of Life Insurance Incidents of ownership include the power to change beneficiaries, borrow against the policy, surrender it, or assign it, and even an indirect power like serving as trustee of a trust that owns the policy can trigger inclusion. For estates above the $15,000,000 federal exemption in 2026, that inclusion can generate a sizable tax bill on money that would otherwise pass tax-free.3Internal Revenue Service. What’s New – Estate and Gift Tax
Tax Traps That Catch People Off Guard
The Goodman Triangle
When the owner, the insured, and the beneficiary are three different people, you’ve created what estate planners call a Goodman triangle, named after a 1946 tax court case. The IRS treats the payout as a taxable gift from the owner to the beneficiary. Picture a parent who owns a policy on an adult child’s life and names a grandchild as beneficiary. When the child dies, the IRS views the parent as having made a gift of the full death benefit to the grandchild. On a $2 million policy, that’s a $2 million gift, eating into the parent’s lifetime exemption and potentially triggering generation-skipping transfer tax.
The fix is to collapse the triangle so only two people fill the three roles. Either the owner and the beneficiary are the same person, or the owner and the insured are. When that’s not practical, an irrevocable life insurance trust can serve as both owner and beneficiary.
The Transfer-for-Value Rule
Life insurance death benefits are generally received income-tax-free.4Internal Revenue Service. Life Insurance and Disability Insurance Proceeds Sell or transfer a policy for valuable consideration, though, and that tax-free treatment largely disappears. The beneficiary can only exclude from income what was paid for the policy plus any later premiums. The rest of the death benefit becomes taxable.5Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits
There are exceptions. The rule doesn’t apply when the policy is transferred to the insured, to a partner of the insured, to a partnership the insured is in, or to a corporation in which the insured is a shareholder or officer. It also doesn’t apply when the transferee’s basis is determined by reference to the transferor’s basis, which covers most gratuitous transfers and certain corporate reorganizations.5Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits The practical takeaway: never sell a policy without running it past a tax advisor first.
Gift Tax on Premium Payments
If you pay premiums on a policy you don’t own, those payments are gifts to whoever does own it. As long as total gifts to that person stay at or below $19,000 per year (the 2026 annual exclusion), no gift tax return is required.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Go over, and you’ll need to file Form 709 even if no tax is owed, because you’re drawing against your lifetime exemption.7Internal Revenue Service. Instructions for Form 709 – United States Gift and Generation-Skipping Transfer Tax Return
When to Use an Irrevocable Life Insurance Trust
An irrevocable life insurance trust (ILIT) is the standard tool for keeping a large death benefit out of both the insured’s and the owner’s taxable estates. The trust owns the policy, the trust is the beneficiary, and a trustee who is neither the insured nor the grantor runs it. Because the insured holds no incidents of ownership, the proceeds aren’t included in their gross estate under IRC §2042.2Office of the Law Revision Counsel. 26 U.S. Code 2042 – Proceeds of Life Insurance
Timing matters. If you transfer an existing policy into an ILIT and die within three years of the transfer, the benefit snaps back into your taxable estate as though the transfer never happened.8Office of the Law Revision Counsel. 26 U.S. Code 2035 – Adjustments for Certain Gifts Made Within 3 Years of Decedent’s Death The cleaner approach is for the trust to buy a new policy from the start, which avoids the lookback.
Premiums paid into the trust are technically gifts, but they can qualify for the $19,000 annual exclusion if the trust gives beneficiaries withdrawal rights, commonly called Crummey powers. Each beneficiary with a withdrawal right generates one annual exclusion, so a trust with four beneficiaries could absorb up to $76,000 in annual contributions without touching the grantor’s lifetime exemption. The trustee has to send written notice each time a contribution is made, giving beneficiaries a window (typically 30 days) to withdraw. Beneficiaries almost never exercise the right in practice, but having it is what turns a future-interest gift into a present-interest gift.6Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
If You’re a Business Insuring an Employee
Companies that own life insurance on their employees face a separate layer of compliance. Under IRC §101(j), the death benefit on an employer-owned policy is taxable income to the employer unless specific notice, consent, and status requirements are satisfied before the policy is issued.9Office of the Law Revision Counsel. 26 U.S. Code 101 – Certain Death Benefits Miss the paperwork and the company keeps only what it paid in premiums; the rest goes to the IRS.
Before the policy is issued, the employer must give the employee written notice of three things: that the employer intends to insure their life, the maximum face amount, and that the employer will be a beneficiary. The employee then has to provide written consent to being insured and acknowledge that coverage may continue after they leave the company.10Internal Revenue Service. Notice 2009-48 – Treatment of Certain Employer-Owned Life Insurance Contracts Verbal acknowledgment doesn’t count, though electronic signatures are acceptable if they meet the administrative requirements.
Even with proper consent, the proceeds are only tax-free if the insured fits a qualifying category: an employee at some point during the 12 months before death, or a director or highly compensated employee when the policy was issued.9Office of the Law Revision Counsel. 26 U.S. Code 101 – Certain Death Benefits Proceeds paid to the insured’s family or estate also escape tax. Businesses with these policies file Form 8925 each year, reporting the number of employees covered and the total coverage in force.11Internal Revenue Service. About Form 8925, Report of Employer-Owned Life Insurance Contracts
What Can Still Go Wrong After the Policy Is Issued
A policy isn’t fully secure the moment it’s issued. Every policy carries a contestability period, almost universally two years from the issue date. During that window, the insurer can investigate a death claim and deny it if the application contained material misrepresentations. After contestability expires, the insurer’s ability to challenge the policy is sharply limited, generally restricted to outright fraud like an impostor sitting for the medical exam.
What counts as “material” varies by state, but the core test is whether the inaccuracy would have changed the insurer’s decision to issue the policy or the rate it charged. Some states require proof the applicant intended to deceive; others treat honest mistakes as grounds for rescission if the error was material. Omitting a cancer diagnosis is clearly material. Misremembering the date of a routine checkup probably isn’t.
Policies also contain a suicide exclusion, typically two years from the issue date (one year in a few states). If the insured dies by suicide during that period, the insurer returns premiums paid rather than the death benefit. After the exclusion ends, suicide is covered like any other cause of death.
Third-party policies draw extra scrutiny when a claim is filed. If there’s any sign of coercion, intentional harm to the insured, or a policy taken out without legitimate insurable interest, the insurer can deny the claim and courts will back them up. Fraud in procurement is not protected by the usual time limits that shield honest mistakes after contestability closes.