There’s a scene in the movie Double Indemnity where Phyllis Dietrichson — an unhappy housewife — plops herself on the couch next to her husband’s auto insurance broker, Walter Neff, and with one ominous question, sets the movie’s diabolical plot into action.
“I want to ask you something, Walter,” she says. “Could I get an accident policy for him without bothering him at all?... I have a little allowance of my own. I could pay for it and he needn’t know anything about it.”
The question, which is in reference to Phyllis’s husband, makes Walter visibly uncomfortable, and it’s not long before he heads for the door. “You wanna knock him off, don’tcha?” he presses Phyllis, before leaving the couple’s home.
Eventually, the audience discovers Phyllis wants to kill her husband and collect the insurance money. And letting his enamorment with the lady get the best of him, Walter agrees to help her pull it off.
If you’ve ever seen this movie, you might have a less-than-ideal impression of the motives behind taking a life insurance policy out on someone. Sensational stories like this one make for good television — or at least they did in 1944, when this film noir crime drama was released — but they don’t reflect reality. Taking a life insurance policy out on someone else can be spun to look suspicious but there are actually legitimate (see: not motivated by murder) reasons why people do it.
Why take life insurance out on someone?
Taking a life insurance policy out on another person is typically done to ensure your fiscal well-being in the event that the insured person passes away.
“We’re talking about what’s going to interrupt our life plan and therefore kick our legs out from under us financially,” says Lori Claxton, a Sun Life insurance agent. “How do we handle those?"
For example, maybe your spouse is the sole earner in your family and you want to be sure that you and your children are taken care of should they pass away; or maybe you’ve loaned someone money and you want to ensure it’s repaid; or maybe — and this is the most common reason — you take a policy out on your child so that they have insurance from a young age.
“People who lose children are never the same again,” explains Claxton. “We cannot as human beings circumvent what happens emotionally but we certainly can financially. And when a child becomes critically ill and perhaps passes away, it’s a very expensive endeavour… People’s lives could be in a turbulent position for a very long time.”
Taking a policy out on a child can give parents the financial security to take time off work,or maybe not go back at all. It can also guarantee the child’s insurability later on in life, since it’s generally cheaper and simpler to get life coverage when you’re young and healthy than as you get older.
How do you take life insurance out on someone?
“Here’s the most important word in buying insurance on someone else,” says Claxton. “Insurable interest. That’s what underwriters are looking for: how does this impact you — the person buying this policy — if that person dies? And why do you want it on that person?”
To get the answers to those questions, you’ll need to divulge what the relationship is between you, the owner of the policy, and the insured. (As the owner of the policy, you’re the only person who can make changes to it.)
You’re proving yourself in relationship, in health, and wealth
Not only do you have to prove why you want insurance on this person; you also need to justify the amount of insurance you’re asking for. An example: one spouse is a doctor and makes $400,000 a year. The other is a stay-at-home parent by choice. The doctor can’t take out millions of dollars of insurance on the stay-at-home parent’s life because it doesn’t make any sense why he or she would need that much money should they pass away.
“An underwriter will come back and say, ‘why are you buying this much insurance? Can you explain?’... It needs to be logical,” says Claxton.
Once those items are established, the age of the insured needs to be considered. If they’re a minor (under 18), they don’t need to be present to sign; but if they’re 18 or older, then they must sign for the policy and chances are they will need to undergo a medical exam, or some form of medical questioning.
“You’re proving yourself in relationship, in health, and wealth,” says Claxton. “All three of those things will be factored into purchasing the insurance — no matter who’s buying it on whom.”
How do you prevent abuse of the process?
There are several checks and balances in place that help agents be sure that taking a life insurance policy on someone else is being done for legitimate reasons.
“Agents aren’t underwriters but they are the first line of underwriting,” says David Mendenhall, a life insurance broker at Mendenhall Financial. “So they’re going to screen people.”
Once agents tick the insurable interest box, there are a few more ways they can vet the legitimacy of an application. Medical examinations for those 18 and over is one. And so is practicing what Claxton calls “field underwriting.”
When insuring a minor, however, you can buy a policy without the child knowing or signing.
“In the old days we used to have to lay eyes on these children,” says Claxton. “I still don’t write anything without seeing somebody. If I don’t see those children, I don’t write those children.”
Beyond these measures, all life insurance policies have what’s called an incontestability period, where in order to guard against fraud, the insurer will dig deep to verify the legitimacy of any claim made within the first two years of the policy being issued.
“The insurance company is going to go through everything with a fine-tooth comb,” says Mendenhall. “They’re going to go into detail, and they’re going to find out if you lied.”
Life policies also feature a suicide clause, which says that the person insured under the policy cannot commit suicide within the first two years of the policy being issued, or the beneficiary won’t receive the payout. The clause is designed to deter the insured from taking their own life so that their family can receive a financial windfall, since it requires that premiums be paid for at least two years.
“As morbid as it sounds, you could take care of your family by committing suicide and make sure they’re financially okay,” says Mendenhall.
Insurance agents like Mendenhall and Claxton know firsthand the implications of the work they do — and why it’s so important to get it right.
“A life insurance policy is a promise on a piece of paper to pay your family if you’re gone,” says Claxton. “I don’t think any of us take that lightly.”