If you search the web for the title of this article, you’ll most likely see a resounding “No!”. That response is not completely accurate. In most instances, you are not able to buy life insurance on someone else without their knowledge or involvement. However, there are certain situations where you would be able to purchase a life insurance policy on a person without them knowing.
Confidential Life Insurance
In practically all life insurance policies placed in the United States, the insured is at least somehow involved.
Whether he or she took an exam, signed a medical records release form, or even completed a phone interview, the person who the insurance is actively covering participated in the underwriting or application process.
This is necessary since the insured person is the one whose health the underwriters review.
But what if this person is either dragging their feet on getting coverage or you don’t want the potential insured to know that you have a policy on his or her life?
Confidential Failure To Survive
Confidential life insurance, also known as confidential failure to survive, has some very strict limitations. If you want to buy a life insurance policy on someone else, you can’t just go out and buy one on your buddy who likes to race cars and base jump.
A confidential failure to survive policy is written when one party (the policy owner) has a contractual justification for purchasing insurance on a second party (the insured).
Examples of this would include bank or personal loans, venture capitalists relying on a key person, or business managers who rely on the earning capabilities of others. We also see these types of policies issued in divorce or business acquisitions.
These policies are issued by Petersen International, a coverholder of Lloyd’s of London.
Take the case of ABC Software:
In 2010, ABC software was set to acquire a competing firm, XYZ Software. The sale was contingent on one of XYZ’s employees, who created a revolutionary piece of software that could change their industry.
With the deal being imminent, ABC needed to purchase life insurance on this engineer as soon as possible in order to move the deal forward.
Utilizing a confidential failure to survive policy, ABC was able to secure coverage on this engineer for 50 million dollars, without any of the underwriting procedures required by the traditional life insurance carriers.
The policy was issued in 48 hours and the deal went through. The premium for the 40-year-old employee was $125,000 annually, and since the policy was not needed for more than one year, the company didn’t renew it.
How Does It Work?
To most, this type of policy is very foreign, as it should be. People will often ask “can I buy life insurance on someone else” but are normally inquiring for personal reasons. Confidential life insurance policies have a very specific niche, one that most people will never have a need for in their lifetimes.
These policies are built for people who have three issues:
- They would suffer a financial loss due to a contractual obligation should the insured die.
- For whatever reason, the owner requires that this coverage is kept secret from the insured.
- They might not qualify for a traditional policy.
In order to purchase one of these policies, the policy owner must provide contractual and financial justification. The agreement is essential and this type of policy cannot be purchased without them.
Also, these policies are typically renewed every year. An annual review of the financial agreement is required before the policy can be renewed. These are normally short term solutions, however, the plan can last for several years if necessary. Renewal normally involves a short-form application and is often processed with minimal time commitment.
Essentially, the process is very streamlined and requires a series of 4 Steps:
1) Submit the application with the existing contractual obligation documentation.
2) Allow for the normal underwriting process time, which is typically 2-3 days.
3) The policy is issued and paid for. Coverage is in force, subject to exclusions.
4) Annual review of the existing financial obligation is required.
Take the case of Rene R:
Rene is a talent agent with a very small clientele. One of his performers has just signed a major recording contract, worth almost 80% of his annual billings. Should Rene lose this client due to an unforeseen death, his talent agency would suffer immensely.
His solution: the purchase of a 10 million dollar confidential failure to survive policy. By spending less than $20,000 annually on his 24-year-old client, Rene can protect most of his future earnings, should his client unexpectedly pass away.
Who can be covered?
Anyone with a contractual financial obligation to another party is eligible for coverage. Spouses are excluded for purchasing these policies on one another. However, it is not unusual to see an ex-spouse covered to protect alimony or child support payments.
What is covered?
Death benefits are payable to the beneficiary upon the death of the insured, just like a traditional life insurance policy.
There are several exclusions in a confidential life insurance policy. An exclusion is where the insurance company won’t pay the death benefit due to the manner of death. All traditional life insurance policies have exclusions as well.
For confidential life insurance, many of the exclusions are the same as those that you might see from a traditional life policy:
- Participating or dying because of terrorism or war.
- Death due to any emotional or psychiatric problem.
- Taking of illegal drugs, misuse of prescription drugs, or alcohol abuse or addiction.
- DUI resulting in death
- HIV, AIDS, or AIDS-related complex (ARC) and other STDs.
How Do I Buy Life Insurance On Someone Else?
The process is fairly straightforward.
First, a contractual financial obligation must be in place and must be reviewed. Second, there are basic insurability questions that the policy owner must answer. And finally, the need and purpose must be evident. That means the coverage must match the potential for financial loss.
The application is simple and requires little information. Policy face values range from $100,000 to $20,000,000 or more. Policies can be issued in as little to 2-3 days.
Confidential life insurance is almost unheard of in traditional life insurance circles. It is a highly specialized policy, designed to protect against financial loss when there is a contractual obligation between two parties.
While not appropriate for most situations, this policy is ideal in business transactions or when one party doesn’t want the other to know about the coverage.
Our company, High Income Protection Insurance Agency, focuses on helping individuals and business owners solve their unique problems. We provide expert, unbiased advice about insurance solutions for high-income professionals.
We can help. Contact us today at 888-636-2310 or visit www.highincomeprotection.com and complete a quote request.