Updated August 7, 2026. Quick answer: you cannot insure the life of a stranger. The rule is called insurable interest, and it decides who is permitted to own a policy on whom — a question most people never think about until they are arranging cover on a parent, a business partner, or an adult child.
What the law requires
Cal. Ins. Code §10110.1 defines it as “an interest based upon a reasonable expectation of pecuniary advantage through the continued life, health, or bodily safety of another person” — or “a substantial interest engendered by love and affection in the case of individuals closely related by blood or law.”
Two doors, then: money or family. A close relative qualifies on affection alone; everyone else has to show they are financially worse off if the insured dies.
Your own life is the unlimited case
An individual has unlimited insurable interest in their own life, and may name any beneficiary they choose regardless of whether that beneficiary has an insurable interest.
That asymmetry is the practical heart of the rule. You may insure yourself and leave the money to anyone. What you may not do is take out a policy on somebody else without qualifying — which is why arrangements are usually structured with the insured as the applicant.
The timing rule that surprises people
“An insurable interest shall be required to exist at the time the contract of life or disability insurance becomes effective, but need not exist at the time the loss occurs.”
So a policy validly taken out does not become void because the relationship later ends. A business partner who leaves, or an ex-spouse, does not automatically invalidate cover written while the interest existed — which is a reason to review beneficiary designations after a separation rather than assuming the law has tidied up for you.
And the consequence of getting it wrong at the start is total: insurance procured on another “is void unless the person applying for the insurance has an insurable interest in the individual insured at the time of the application.” Void, not adjusted.
Consent is separate, and required
Where an employer insures a director, officer, employee or shareholder, it must obtain “the written consent of the individual being insured”. Qualified charities may insure a donor with the insured’s consent.
Insurable interest and consent are two requirements, not one. Having a financial stake in someone’s life does not by itself entitle you to insure it without telling them.
Where this meets the gift-tax trap
Insurable interest explains who may own a policy. It says nothing about the tax consequences of the combination you choose — and a perfectly valid three-party arrangement can still produce an accidental gift: the Goodman triangle. Passing the insurable-interest test is not the same as having structured the policy well.
We sell no insurance and take no commission. This is reference material about published law.
Sources and coverage
Cal. Ins. Code §10110.1, read at California Legislative Information on 2026-08-07.
Honest gap. California is quoted here; insurable interest is a state-law doctrine and the definitions vary. The two-door structure — pecuniary interest or close family — is broadly common, but the categories, the treatment of employers and charities, and the remedies differ, and we have not read the other states. This page also does not cover the investor-originated policy history that shaped these rules, which is a separate subject.
See methodology and corrections. General information about published law, not legal or insurance advice. No advertising appears on this page and we earn nothing from it.