When you get married, life changes in unexpected ways.
Every decision you now make not only affects you, but your partner as well. You need to plan for your joint future, which means asking tough questions like “What would happen to my spouse if I were to pass away?”
Life insurance for couples is a smart way to secure both of your futures, should the worst happen.
Luckily, shopping for life insurance for a couple is not all that different from buying a life insurance policy as a single person.
It starts with figuring how much life insurance you need and for how long. Couples, however, have some additional considerations, such as whether to buy two single policies or a joint policy and how much coverage is sufficient for a non-working parent.
Why Couples Need Life Insurance
Married couples or live-in partners often share financial responsibilities, like a mortgage, a co-signed loan, or a joint bank account. If you pass away unexpectedly, the burden of these shared expenses will fall on the shoulders of your spouse or partner — unless you have life insurance.
Life insurance is a financial lifeline for your dependents if the unthinkable happens, providing them with enough funds to live comfortably. They can use the death benefit amount to cover everyday living expenses, pay off a mortgage, or take care of education costs.
You would not want those closest to you to experience a financial hardship in addition to the tragedy of losing a loved one. In this scenario, financial hardship is easily preventable.
When to Buy Life Insurance as a Couple
Life insurance is hardly a topic for the first date, but it is certainly something you might want to talk about when approaching a major milestone — like when you start living together or get married. From now onward, every financial or important decision — such as buying a car, a home or starting a family — will involve two people and maybe two salaries. How can you secure both your futures against life’s what-ifs?
Life insurance is a great solution for most people. And the best time to get it is while you are young because premiums are low. In fact, term life insurance rates for healthy, young people can be as low as the cost of a large pizza!
Types of Life Insurance for Couples
Looking for life insurance for couples? You basically have the following four options:
- Single life insurance
- Joint-first-to-die life insurance
- Joint-last-to-die life insurance
- Combined life insurance
Combined life insurance is like a joint life insurance policy. Just like joint insurance, combined covers both partners, but there are some key differentiating factors.
Single Life Insurance
A single life insurance policy covers only one individual and is not tied to the insured’s marital status. In the event of the insured’s death, the provider issues the death benefit to the beneficiary.
In the case of term life insurance, the beneficiary receives the payout only if the insured dies within the life insurance policy’s term. Permanent life insurance, by contrast, has no such restrictions. The insurance company pays the policy’s proceeds to the beneficiary whenever the insured dies, provided the policy remains active.
Join First-To-Die Life Insurance
Joint life insurance is built for two. It covers the life of both partners but requires only one application. The policy also pays out only once, and the coverage ends when the insurer issues the payout.
Those looking for life insurance for young married couples may find a joint life policy a good option. This is because it is generally cheaper than two separate policies.
Joint life insurance comes in two types: First-to-die and Last-to-die.
A joint first-to-die policy pays the entire death benefit when the first of the two insured persons passes away. Such a policy can be used to pay off a mortgage or other debts. It takes the burden of paying debt off the survivor’s shoulders, saving them from much financial distress. You can also use a first-to-die policy as an income replacement tool, especially when you and your partner have similar incomes.
This type of policy can come in handy in a business setting as well. You and your partner can use it to fund a buy-sell agreement to ensure your company does not experience financial hardships if either of you dies unexpectedly.
Just like a single-person life policy, a first-to-die policy ends once the insurer issues the benefit. If the surviving partner still needs coverage, they must apply again.
Joint Last-To-Die Life Insurance
A joint last-to-die policy pays the death benefit after the passing a way of the second insured. It is also known as simply last-to-die or survivorship life insurance. After the passing away of the first insured, the other insured must continue making premium payments to keep the policy active.
Since the surviving partner does not receive any financial benefit, the joint last-to-die insurance is not recommended as an income replacement or debt repayment tool.
So, when does last-to-die life insurance make sense? You may want to consider it if you wish to leave behind a legacy for your heirs.
Combined Life Insurance
Combined life insurance involves combining two individual life insurance policies into one.
What is in it for me? You may want to ask.
Well, life insurers tend to offer handsome discounts to couples who combine their life insurance policies into one. You can expect to cut down your insurance cost by up to 5%.
A combined life policy works pretty much the same way as two individual life insurance policies. That means the policy will cover both the partners and issue the death benefit twice.
How Much Life Insurance is Enough For Couples?
There is no one-size-fits-all answer since every couple is unique — as are their life insurance needs. Generally speaking, your couple life insurance policy should provide enough coverage to cover existing debts, income, mortgage, and college education. This method of determining how much coverage you need is called the DIME formula.
- Debts – Your total outstanding debt, excluding your mortgage
- Income – The lost income that you want your life insurance policy to replace
- Mortgage – The amount owed on your mortgage
- Education – The amount your children will need to cover their college tuition fees
Here is an example that shows how you can use the DIME formula to figure out how much coverage you need.
Start by calculating your debt, excluding the home loan. If you do not want to burden your family with the cost of your funeral, include that too.
Let’s assume you have a debt of $30,000 and your funeral estimate is $10,000.
Debt: $30,000 + $10,000 = $40,000
Now figure out the number of years for which your loved ones would require your support. Next, multiply your annual salary by this number.
Let’s say you earn $60,000 in a year. Your family is likely to be dependent on you for another 20 years.
Income: $60,000 x 20 = $1,200,000
Consider the amount of money you owe on your home loan.
Let’s say your mortgage balance is $40,000.
What will be the cost of college in 20 years for one kid? For the sake of convenience, let’s consider the maximum lifetime limit of an RESP — $50,000.
According to the DIME method, you will need $1,330,000 in coverage for 20 years.
Do You Have Cost-Effective Insurance?
A part of your life insurance premium goes toward paying the administrative charges associated with the policy. The more policies you have, the more administrative fees you will have. You can cut down on your insurance cost by buying one big policy rather than several smaller ones.
For financial needs with an end date, a term life insurance policy may work out better. Since it is six to 10 times cheaper than permanent life insurance, you will be able to get more coverage.
Which Type of Policy is Best For You and Your Spouse?
Generally speaking, separate term life insurance policies are a better option than joint policies for couples. That is because term life insurance policies:
- Are more affordable
- Offer greater flexibility regarding how long the policy will last and what riders you can add-on
- Does not pose a problem if the couple decides to part ways
If the partners separate, a joint life policy can complicate things. Barring a few exceptions, such a policy cannot be divided. So in the event of a divorce, couples have two options:
- Cancel the policy and buy life insurance afresh
- Let one partner take over the policy
However, joint life insurance can prove useful in certain situations, for instance when one partner’s health prevents them from qualifying for a separate life policy.
Life Insurance for Stay-at-Home Parents
Life insurance is frequently projected as an income replacement tool. This may give the impression that stay-at-home parents do not need it. But that is certainly not the case. While stay-at-home parents may not contribute to the family’s income, they provide other services — like childcare — that would need to be replaced if something happened to them.
Simply put, the death of a stay-at-home parent does affect the family financially. Therefore, consider buying life insurance for your spouse, even if they do not earn a regular paycheck.
Moving in with a partner or getting married is a major milestone.
While you should celebrate, do not forget to do something that is even more important — plan for the future. That includes becoming prepared for unexpected circumstances, including death.
This is where life insurance comes in. It replaces some or all of your income if you die before you expect to and helps support your partner in your absence. Term life insurance is sufficient for most couples, but both partners need coverage.
Life insurance experts at Dundas Life can help you find the right coverage at the most affordable price.