Life insurance acts as a safety net for your loved ones. However, if you are married, you may need to buy life insurance for both yourself and your spouse to ensure your family is adequately protected from life’s what-ifs.
Should both spouses have life insurance?
In short, the answer is “yes.” Whether or not your spouse contributes to the household income, it is probably a good idea to take out a life insurance policy for them.
These days, generally both partners work to support a family’s expense. If you and your spouse depend on each other’s salary, either to pay off the mortgage or for other living expenses, you would need extra financial support were they to pass away unexpectedly. Therefore, buying coverage for both of you makes sense.
If your spouse is responsible for taking care of young children and running the household, it is just as important to have them covered, as it would be if they had a full-time job. Should the unthinkable happen, you would need to pay someone to perform the tasks your partner does for free. This will put additional financial pressure on you.
Here are some numbers to demonstrate this point.
The average hourly rate for a nanny in Canada ranges from $15-$20. This translates to at least $600 a week or over $31,000 a year. If you multiply the child-care expense over several years, it becomes clear why buying coverage for a stay-at-home parent is a smart decision.
How to purchase life insurance for someone else?
You can buy life insurance for someone only when you have an insurable interest in their life. That is to say, you will suffer financially if that person died. To purchase a policy for another person, you must be able to demonstrate this to the insurer.
Also, keep in mind that the insured — the person on whose life you are taking out a life insurance policy for — must sign the application. The only exception is when the insured is a minor.
Separate and joint life insurance policies
You can buy a separate life insurance policy for each of you or a joint policy. The latter is usually cheaper but having two single life insurance policies will give you more flexibility.
Two Single Life Insurance Policies
A single life insurance policy covers the life of one person. If the policyholder dies while the policy is active, the insurer will issue a payout to the beneficiary.
Having two separate policies is not likely to cut down your insurance cost, but it does offer more flexibility. For instance, if yours is a single-income household, you may want to take out a bigger policy on the primary earners life. Likewise, you may want to buy additional benefits, such as the accelerated death benefit rider.
Single policies are easy to handle in the case of divorce. Both of you can simply continue to maintain your policy after separating.
Joint Life Insurance
Joint life insurance policy covers the lives of two or more people, but it pays out only once. Most joint policies are permanent, which means they last your entire lifetime, provided you pay premiums. However, some life insurers also offer term plans, usually 10 or 20 years.
If you decide in favor of a joint policy, it would be best to purchase one having the ‘separation benefit’ feature. These policies can be split in the case of divorce. Otherwise, if you two ever decide to call it quits, the coverage would have to be canceled or one of you would have to take full ownership.
Joint life insurance comes in two types: first-to-die and joint last-to-die.
Joint first-to-die life insurance
A joint first-to-die policy pays out upon the death of the first of the two policyholders. Once the insurer issues the benefit, the coverage ends. The surviving spouse will have to look for a new policy if they still need coverage.
Income replacement and debt management are two primary reasons why couples buy a first-to-die policy. The surviving spouse can use the proceeds of the policy to replace the lost income. As an income replacement tool, a first-to-die policy works really well when both partners have similar incomes.
If your spouse is not the primary earner, using a first-to-die policy for debt management makes good financial sense. How would they be able to afford monthly installments after you are gone? The payout can help your surviving spouse pay off the mortgage and other debts.
Joint last-to-die life insurance
A last-to-die policy pays out after the death of the second spouse. Most couples name their children as the beneficiary, but you are free to name anyone.
With a term plan, your beneficiary will receive the death benefit only if both of you pass away during the policy term. Whether your last-to-die insurance is term or permanent, the surviving partner must continue paying the premiums to keep the policy active.
The primary use of joint last-to-die insurance is estate preservation. Your heirs can use the proceeds of the policy to pay estate taxes and other legal fees associated with estate distribution. You may also want to consider it if you want to leave a legacy for your children or grandchildren or a bequest to a charity or place of worship.
However, because this type of policy pays out only after the passing of both policyholders, it is not recommended as income replacement for your spouse.
So, which one is right for you and your spouse — two separate policies or a joint policy?
Two individual policies may be a good option if:
- There is a big age gap between you and your spouse
- Either of you has health issues
- Either of you have children from a previous marriage
However, joint insurance may be a better fit if:
- You cannot afford two individual policies
- You two are of similar age
- Your marriage or partnership is strong and healthy
Non-working spouse policy
Because life insurance is used primarily for income replacement, it is easy to think that a stay-at-home parent does not require it. However, that would be a mistake.
While non-working partners may not contribute to the household income, they perform important services, like taking care of the children and running the house. If they are no longer around, the working spouse will need to hire someone to do the activities they were in charge of.
So, how much life insurance does a non-working parent need?
There is no one-size-fits-all answer, as it depends on your family’s unique situation and needs. Some important factors to consider are:
- How many children you have
- The age of your children
- The cost of living in your city
- The average income of your household
- How long you want the coverage to continue
Supplemental Spouse Life Insurance
If your employer offers group insurance, you may be able to buy supplemental spouse life insurance to cover the life of your spouse. Many employers offer supplemental coverage in addition to basic coverage included as a part of your employee benefits package.
You can buy supplemental coverage for yourself, your dependents, and your spouse. However, supplemental insurance is not a substitute for an individual life insurance policy. That is because you lose coverage if you are fired or change jobs.
A couple of other things to keep in mind before signing up for supplemental spouse life insurance are:
- Your spouse might have to answer health-related questions. They may be turned down if the insurer decides the risk is too great
- Generally, there is a cap on how much supplemental coverage you can purchase
Purchasing life insurance with your spouse
The best time to purchase life insurance was yesterday. The second-best time is today. Once you and your partner have decided to get life insurance, do not delay. Life insurance premiums increase by 8-10% on average for every year you postpone buying.
The process of buying life insurance as a couple is pretty much the same as it is for singles. The only difference is that you and your partner must first decide whether a joint policy or two separate policies will suit your situation better.
Once that is done, you must figure out:
- how much life insurance is needed
- decide between term and permanent life insurance
- choose a beneficiary
- pick the right insurer.
Deciding how much insurance is needed
While it is not possible to ascertain how much insurance you need right down to the penny, there are ways to come up with a good estimate. A rule of thumb is to have coverage that is at least 10 x your annual income.
So, if you earn $80,000 a year and your partner makes $50,000, buy two policies worth $800,000 and $500,000 respectively. And if one of you is not working, factor in the cost of replacing the labor that stay-at-home partner performs.
The “10 times earnings” rule is not the only way to determine life insurance needs. Another way is to use the DIME formula. It makes sure your life insurance covers four important areas:
- Debt: Refers to the amount of debt you and your partner have, like student loan, credit card loan, or other loans.
- Income: The time period for which your family will need financial support. Multiply the annual income with this number
- Mortgage: Your home loan does not disappear when you pass away. So, factor it in as well
- Education: Refers to the cost of education of your children
Whether you use the “10 times earning” rule, the DIME formula, or some other formula to determine your life insurance needs, you should take into consideration four things:
- Your household income
- Your assets
- The total debt you have (a mortgage, student loans, or credit card loans)
- The cost of maintaining your lifestyle
Decide between term and permanent life insurance
Term life insurance provides life insurance for a specific number of years or until the insured reaches a certain age. These policies are six to 10 times more affordable than permanent plans.
Term life insurance is better suited for couples who:
- do not have a lifelong dependent
- are not looking for life insurance to leave an inheritance
- want to keep their life insurance costs as low as possible
Permanent life insurance is coverage designed to last as long as you do, provided you pay the premiums. Many of these policies also build cash value. The policy’s cash value is for you to use during your life time. Your beneficiaries receive only the death benefit upon your death.
Permanent life insurance is a good fit if:
- You have a lifelong dependent
- You want to leave an inheritance
- You want life insurance for estate preservation purposes
- You are a well-off individual who has already exhausted traditional investment channels
For most couples, term life insurance works out better. It is more affordable and simpler. But if yours is a special situation, you may want to consider permanent life insurance instead.
Choose a beneficiary
A Life insurance beneficiary is the person who receives the death benefit when the insured passes away. Most spouses name their partner as the beneficiary, but you are free to choose anyone. You can also name more than one beneficiary.
Pick the right insurer
Whether you and your spouse want a joint policy or two individual policies, it pays to shop around. Premium rates vary wildly from one provider to the next. Comparison shopping is the only way to ensure you get the best value policy.
Both you and your spouse need life insurance, even if only one of you brings in an income.
Depending on your family’s situation and needs, you can buy a joint policy or a separate life policy each for yourself and your spouse.
Dundas Life works with top Canadian insurers and can find you affordable life insurance to help you secure your family’s financial future.