Can Someone Else Own a Life Insurance Policy on Your Life?

Yes, another person or entity can own a life insurance policy on your life, provided they have an insurable interest in you at the time the policy is issued. Insurable interest means that the owner would suffer a financial loss if you were to die. This requirement exists to prevent life insurance from being used as a wagering contract and is a fundamental principle of insurance law that has been part of the legal framework for centuries.

Common examples of third-party ownership include a spouse owning a policy on the other spouse's life (the surviving spouse would suffer financial loss from the death), a parent owning a policy on an adult child's life, a business owning a policy on a key employee or partner (the business would suffer financial loss from losing a key contributor), and a trust owning a policy on the grantor's life (for estate planning purposes where the trust beneficiaries have a financial interest). Each of these arrangements involves a legitimate financial interest that satisfies the insurable interest requirement.

Third-party ownership is a cornerstone of advanced estate planning. When someone other than the insured owns the policy, the death benefit is not included in the insured's taxable estate for federal estate tax purposes (assuming the insured has no incidents of ownership). For affluent families with estates above the federal exemption threshold, this can save hundreds of thousands of dollars in estate taxes — up to 40% of the death benefit amount.

The most common structure for estate tax planning is an Irrevocable Life Insurance Trust (ILIT), which owns the policy, pays premiums (funded by the grantor's gifts to the trust using the annual gift tax exclusion and Crummey withdrawal provisions), and distributes the death benefit to trust beneficiaries according to the trust terms. The ILIT provides complete removal of the death benefit from the insured's taxable estate while maintaining structured control over how and when the funds are distributed to beneficiaries.

For business purposes, third-party ownership is used in key person insurance (the business owns a policy on a vital employee), buy-sell agreements (each partner or the business owns policies on the other partners to fund the purchase of a deceased partner's interest), and executive benefits (the business owns policies on executives as part of a deferred compensation or split-dollar arrangement). These arrangements protect the business from the financial disruption of losing key individuals.

The insured typically must consent to the issuance of a third-party-owned policy and may need to participate in the underwriting process, including medical exams and health questionnaires. The owner controls all policy decisions — including beneficiary designations, cash value access, and premium payments — but cannot change the insured person. The insured's cooperation is needed only at the time of application and underwriting.

When considering third-party ownership, it is important to understand that the insured gives up all control over the policy. They cannot access cash value, change beneficiaries, or make any policy decisions. This loss of control is the trade-off for the estate tax benefit and must be acceptable to the insured before proceeding. For business arrangements, the employment or partnership agreement typically governs what happens to the policy when the relationship changes.