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While buying life insurance for someone else is possible and legal, there are restrictions that must be followed. You cannot purchase life insurance for a total stranger.
Buying For a Family Member
To purchase life insurance for a family member (i.e. parent) or child, you must be able to show that your have an "insurable interest." This simply means that you are related by blood or marriage to the person for whom you are purchasing the policy.
Most times, you purchase a life insurance policy for your child. Dozens of companies offer policies, both term life and whole, that can be extremely cost efficient. The younger you are when a policy is purchased in your name, the lower the monthly premiums. If you have just had a baby, now is the perfect time to purchase a life insurance policy.
Odds are slim that you will use it, but if anything does happen to your child, you would want to be able to grieve without worrying about how to pay for the funeral expenses and lost income while you take time off from your job to grieve.
Finally, life insurance policies can be purchased sons and daughters for their aging parent or both parents. Often, the elderly allow insurance policies to lapse due to forgetfulness or simply lack of money. Adult children can purchase and become responsible for making the payments instead of allowing their parents to struggle with that monthly expenditure.
Buying For Business Partners
For business owners, "insurable interest" also applies because you have a strong business related connection. Often, business partners, get life insurance on each other.
Business partners often take out life insurance policies on each other when a business is formed. This helps ensure that the business will not suffer if one partner dies unexpectedly. The money is used to pay off the heirs of the partner that died so that they do not gain shares or control of the business.
Another scenario where it is natural for someone to purchase a life insurance policy for someone else involves spouses. It is not surprising that husbands and wives would want to purchase a life insurance policy for their spouse.
In case anything happens, a life insurance policy would ensure that they do not go into debt after losing the income they'd become accustomed to. The life insurance benefit can also be used to pay for funeral expenses, pay the mortgage, pay for kid's education, etc.