Life insurance can provide your family with financial protection if should the worst happen to you. But what happens when the circumstances are reversed? If you rely on a family member financially, is it possible to buy an individual life policy for them that protects you?
In most cases, it's only possible to buy life insurance for your spouse or civil partner, although you may be able to do so for someone else by proving that an 'insurable interest' exists on your part were this individual to pass away. In simple terms, this means reasonably demonstrating that you would struggle financially if the insured person were to die.
Insurable interest is a legal requirement for all insurance policies at the time the policy is taken out. The Economic Times defines insurable interest as 'the reasonable concern of a person to obtain insurance for any individual or property against unforeseen events such as death and losses'.
In UK law, insurable interest extends to the life of spouses and civil partners, but not between other immediate family members including:
Although the English and Scottish Law Commissions have tried to clear up this complex law by increasing the limits of insurable interest, it's currently not possible to buy life insurance for anybody other than your spouse or civil partner in England, Wales and Northern Ireland. Scotland is an exception, where children have an interest in the lives of their parents if they have an obligation to provide maintenance. Another exception is where two friends purchase a property together. They usually have an insurable interest equivalent to the amount of the mortgage.
One way around this issue is for people to assign their policy to someone else. A deed of assignment is a legal arrangement that transfers the ownership of a life insurance policy from the existing owner to a named beneficiary. As with all transactions of this nature, both parties need to be present to ensure the document conveys what it needs to.
The law assumes that the person buying life insurance would only name a beneficiary within their policy if they wanted to protect them financially. There's usually no requirement for any beneficiary to prove insurable interest at the time the deed of assignment is completed.
Other options include adding provisions in a will or placing the policy in a trust.
As these options are likely to have different tax implications, you should always seek advice from your legal adviser.
There are various options available for those looking to purchase life insurance and it's important to choose the right policy type to suit your specific circumstances:
This type of policy allows you to set a fixed amount that will be paid out should you die within the specified term. The amount of cover remains the same for the term of the policy, as do your premiums.
Some people take out level term life insurance because they want to make sure they can leave their family a set amount of money that can be used to cover mortgage payments as well as a variety of other costs that their loved ones may be faced with, such as any outstanding debts. If you're looking to secure financial protection for a fixed cost, level term life insurance is an option to be considered.
Learn more about level term life insurance here.
As the name suggests, mortgage protection insurance is designed to cover your outstanding repayment mortgage should you die before the end of the mortgage term. In the event of a claim, your dependants or next of kin will not have to worry about the monthly mortgage repayments, as your life insurance policy should repay the remaining mortgage amount.
Read more about mortgage protection life insurance here.
This type of insurance is often bought an integrated or independent option in addition to a level term or mortgage protection insurance policy. Critical illness cover provides a lump sum if you're diagnosed with a specified illness, usually including serious conditions such as heart attacks and cancer.
Discover more about the protection offered by critical illness cover here.
At Compare Cover, we're dedicated to helping people protect their world for less. As a specialist online comparison service, we will help you research all your life insurance options so you can find the right policy at the best possible price.
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