What is third party life insurance? It’s when the policy owner, the person who pays for the policy, and the insured person are not necessarily the same. We’ll explain when this happens, and who can benefit from this type of arrangement.
Third party life insurance is when three or more people (or entities) share the four roles inherent in a policy, as opposed to the more traditional usage, where two people (or entities) fill those roles.
Every life insurance policy revolves around four roles:
Not every policy has four distinct people or entities in each role. Most don’t, in fact. But there are certain situations, especially in a business context, where having these distinct roles makes life insurance a financial tool that works for businesses and charities.Get a Free Quote Now
To answer the question, “What is third party life insurance,” we need to talk about insurable interest.
Every state has its own specific rules that limit who can take out a life insurance policy on another person. To do this, there must be something called “insurable interest.” This means you need a financial reason for that coverage. That could be a shared household, where both parties contribute income for general expenses. Or it could be ex-spouses who don’t live together but contribute to the costs of raising their children.
These rules don’t allow you to take out third party life insurance on, say, a boyfriend or girlfriend unless there are shared financial commitments or obligations. You also couldn’t take out life insurance on, for example, your boss. Although they may pay your salary, they are not responsible for your financial commitments (kids, mortgage, etc.), so there would be no insurable interest.Get a Free Quote Now
In most cases, when you’re shopping for life insurance, you want to insure yourself in order to provide for your loved ones as your beneficiaries. You get a quote, you take a medical exam (unless you buy a non-med policy), you sign the insurance contract, and you start making payments. Easy, right?
In this scenario, you are both the insured, the owner, and the payer, responsible for making the premium payments. The only other person involved is your beneficiary, who will get the income-tax-free death benefit when you pass away. There’s no question of insurable interest since you’re buying the policy to cover your own financial obligations.
If this is your situation, you’ll probably never ask the question, “What is third party life insurance.” Your experience will be much more straightforward, with less paperwork!Get a Free Quote Now
But there are also plenty of reasons why you might be insured, but not own or even pay for your policy. That would make your situation a “third party life insurance” scenario.
Let’s look at what happens when you’re the insured, but not the owner.
Another situation is when you’re the insured, but an entity instead of a person owns the policy, usually for tax efficiency.
A third situation illustrates what happens when the insured is not the owner or the payer.
We hope we helped you understand the answers to the question, “What is third party life insurance?” Looking for some help when it comes to life insurance? We’re here to help! Call us at (800) 521-7873 or email us at email@example.com and let us give you the answers, guidance, and quotes you need!Get a Free Quote Now