I recently was asked some questions by a reader about short term travel life insurance. He was looking at term life insurance quotes and noticed that there is a big difference in cost between short term travel insurance and longer term life insurance. The situation included a guy and his girlfriend who were planning on traveling out of the country for the next year. He asked if he should buy travel life insurance so his girlfriend would profit if he was killed while they were traveling. Secondly he asked what type of insurance would be best – term life insurance for a year or for longer? This is an interesting question with some implications that I would like to explore.
First of all, in order for anyone to purchase life insurance, there must be a relationship with the beneficiary that is referred to as “insurable interest.” Insurable interest in the life insurance industry generally refers to someone who is dependent on you for their financial well being – most often a family member or business partner. In other words, they depend on you financially, and if you die, you want them to be protected. A friend or girlfriend are generally not recognized by life insurance companies as having insurable interest. The interesting thing is that there are some tricks and tips to that will allow someone to be your beneficiary without insurable interest.
One such tip was commonly used in situations where a same sex couple technically have insurable interest but are prohibited from having life insurance on each other because the life insurance company doesn’t consider their relationship to include insurable interest. The way many agents and insured’s got around this rule was to name someone else as the primary beneficiary on the application and simply change the beneficiary after the policy is issued. This is perfectly legal in the insurance world. The bottom line is that if you are trying to assign a beneficiary on your life insurance policy that does not have insurable interest, you should question your own intentions.
Secondly, the fact our reader wants his girlfriend to “profit” if he dies while they are traveling is a red flag. In the insurance world, the term “indemnity” implies to all life insurance policies. It implies that no beneficiary should “profit” in the event of the death of an insured. The purpose of the life insurance policy should be to help make the beneficiary “whole” or provide for their financial well being as it would have existed had the insured not died. In other words, the policy should compensate the beneficiary for the amount of their loss – no more, no less. This is contrary to the definition of profit. In the case of our reader, let’s give him the benefit of the doubt and assume that he actually just used poor terminology with the use of the term “profit.” If he is supporting his girlfriend, then one can arguably make the case that he is only trying to protect her and not have her “profit” in the case of his death. In that case, they could determine the amount of financial loss that she would incur should he die and proceed accordingly.
The last point I would like to make is in response to whether he should buy a shorter or longer term life insurance policy. From the insurance company standpoint, there are generally two things that will increase the cost of a policy – time and risk. The longer the term, or the higher the risk, the more the term life insurance policy will cost. Most companies will also ask if the insured plans to travel outside the U.S. The reason they ask this is that traveling outside the U.S. could be inherently more risky than staying at home. It is probable that some companies will decline the policy entirely or at least exclude coverage in that country if the risk associated with traveling to that part of the world is high. Again, it boils down to the amount of risk the insurance company is taking on by underwriting that policy.
In conclusion, it would be prudent to evaluate why the girlfriend needs to be protected with such a policy, and for how long she needs to be protected for regardless of their travel plans. Once these questions are answered, the proposed insured can structure his assets accordingly, and if it is determined that life insurance is needed to protect her financially, then take the appropriate action. That’s life!