5 Things to Know About Third-Party Life Insurance

Third-party insurance is nothing new, and though you may not be aware of it, you probably already carry some third-party coverage. Nearly every state in the country requires its drivers to maintain liability protection in case they cause bodily injury or property damage to a “third party” with their vehicle. Specific minimum amounts of that coverage are set and required by each state jurisdiction.

Third-party life insurance, however, is totally different than third-party vehicle liability (or any liability) coverage. Third-party life insurance is not something a policyholder buys for him or herself, but for a third party.

Third-Party Insurance Defined

In a third-party life insurance policy situation, there are three parties who are part of the agreement. The first is the policy owner, which is the entity (usually a person but not necessarily) that purchases the policy and is responsible for payment of the premiums. The second is the insurance company, and the third is the individual named in the policy, whose death would trigger payment of the death benefit to the named beneficiary or beneficiaries. Here are some other things to know about this type of policy:

1. As with almost all other insurance coverage, third-party life insurance requires that the policy owner have an insurable interest in the third party. Insurable interest regarding a life insurance policy means that the death of the third person (named in the policy) would cause material loss or financial hardship to the policy owner. An example of this would be an individual taking out a policy on his wife or child.
2. While the first party in the 3-party life insurance policy is often a person, it may also be an entity such as a company for whom the insured is a key employee or officer.
3. The person being insured in a third-party life insurance policy must be aware of and consent to this arrangement. An exception to this rule exists when a parent buys a policy to cover his or her newborn child, who is too young to provide consent. Buying coverage for a child may seem unusual, however, if the child becomes ill and passes away, the medical bills left behind would cause financial hardship to the parents.
4. The first and third parties to a third-party life insurance policy cannot be the same.
5. The beneficiary need not be a person but could be a company, a trust, charity or some other entity.