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If you are married or about to be, you may have found multiple financial decisions that you need to address. Where will you live? How much should you save? What debt should you pay off first? Married couples clearly need to prioritize financial planning to answer these questions.
As a part of your financial planning review, don’t neglect life insurance. Married couples can buy different life insurance policies for different purposes. We’ll describe the various policies and their purposes below.
In this article:
- When life insurance for married couples is a smart decision
- Which type of policy is best for married couples
When life insurance for married couples can be a smart financial decision
Life insurance is designed to protect the people in your life who are reliant on your future earnings potential and to cover your obligations such as loan and mortgage balances. Therefore, we see individuals purchase or increase their life insurance once they marry and start a family.
A couple’s life insurance needs can depend on many factors. Ultimately, the goal is that your family isn’t financially negatively impacted should you pass away prematurely. If you leave behind a spouse, child, or dependent parent, the life insurance proceeds should compensate for their living needs that would have otherwise been provided by your income or household function.
If one spouse is the primary earner
If you or your spouse is the primary earner, at best your future income should be fully protected by life insurance. The income made by the primary earner is likely supplying a majority of the household expenses and savings.
If the primary earner passes away early, the people depending on that income (spouse, children, parents, etc.) will still have household expenses, college costs, and retirement savings to cover, to name a few. Life insurance should be established to eliminate lifestyle changes due to a lack of financial resources.
If you have high costs of living
Couples who rely on each other’s income to afford their current standard of living should consider establishing life insurance.
For example, a couple living in a new home with a $4,000/month mortgage payment may rely on both spouses’ incomes to afford that payment. However, If one spouse passes away, and their income is removed, the remaining spouse may no longer be able to afford that monthly payment. This indicates that a dependency on each other’s income is present.
That type of dependency due to high costs of living should be protected in the form of life insurance. The last thing a surviving spouse wants is to be forced out of their home because they can no longer afford it on their income alone.
If you have debt
If you have debt that will not be forgiven upon death, you need life insurance. Federal student loans tend to be forgiven upon death. All other loans (mortgage, credit card, private student loans, and personal loans) will depend on who owns the debt and what state you live in.
If the debt you owe is joint or cosigned with your spouse, your spouse will likely be responsible for paying off the debt as scheduled should you pass away prematurely. Even if your debt isn’t joint, your estate will likely be responsible for paying off the debt. This may reduce the amount of money your family receives upon your passing. This is why it is important to verify with your state’s estate laws how your debt would pass in the event of your death.
If you want final expenses to be covered
Regardless of when you pass away, you and/or your loved ones may want to have a funeral or celebration of your life. According to the National Funeral Directors Association, the national median cost of a funeral in 2021 was just under $8,000. That expense may not be something you want your loved ones to bear. Consider setting up a life insurance policy to ensure your final expenses are taken care of.
If you want to provide for children
It’s no surprise that children cost a lot of money in today’s world. If you and your spouse are currently caring for dependents, a life insurance policy may help provide for their future. According to the USDA, the cost of raising a child through the age of 17 is $233,610. The kicker? It doesn’t include the cost of college. That’s a lot of money for a surviving spouse to fork over.
If you’re the primary caretaker
If you or your spouse’s household contribution is in the form of caretaking and house maintenance, that warrants reason to have life insurance. For example, if the caretaker of the home currently watches their children while the other spouse is working, that responsibility would need to be replaced in the event of the primary caretaker’s death.
The primary caretaker may also handle more household chores, meal preparation, organization, event planning, and so forth. If this person passes, the surviving spouse now has to pay (in time and money) for daycare, meal preparation, home cleaning, and so forth.
As stated in the previous section, raising a child is expensive. Those expenses will likely remain steady regardless of whether there is one parent or two.
If you want to get a cheaper policy early
Insurance policies use calculations to determine the amount of risk involved in insuring your life. This process is known as underwriting. The two major factors in the underwriting process are your age and your health.
Younger adults have less chance of dying in a given period than older adults. Not only that, they tend to have fewer medical issues. This is why you are likely to get a cheaper policy if you get life insurance earlier in life. Just realize that your life insurance needs may increase later on because of factors such as a larger family or inflation.
Which type of policy is best for married couples?
As a married couple, you have many options for enrolling in life insurance. You may consider getting a policy that insures the two of you together or two policies that insure each of you individually. You can also select the type of policy, such as term or whole life.
Married couples have different needs and lifestyles. Each couple requires a unique analysis of their specific situation. One married couple may have dual income earners with no kids and substantial debt. Another married couple may have children and little or no debt. Their life insurance needs are likely quite different. Let’s discuss each option to better understand what’s best for you.
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Joint or separate life insurance
First, you need to decide if you want a policy to be joint or individual. A joint policy comes in two forms: first-to-die or second-to-die. For a married couple desiring protection in the event of a spouse dying prematurely, it may make sense to purchase a first-to-die policy. These policies pay out in the event of the first spouse passing away (as opposed to second-to-die policies, which pay out upon the surviving spouse passing away).
A disadvantage of the first-to-die policy is that once the first spouse passes away, there is no life insurance on the surviving spouse. This is an issue if the surviving spouse needs to protect their heirs from expenses or debt (like college or a mortgage) should the surviving spouse pass away. One way to avoid this situation is bypassing a joint policy and taking out two individual policies.
A disadvantage of the second-to-die policy is that there is no immediate benefit to the surviving spouse since no payout is given until both spouses pass away. Instead, this policy is good for estate planning purposes to provide for children. They can also be less expensive because the younger spouse is priced for the underwriting.
Individual policies are straightforward—they insure the life of one individual. As a married couple, it most likely makes sense for each spouse to get an individual policy on their own life.
The table below outlines when a payout occurs with each policy type:
|Joint First-to-Die||Joint Second-to-Die||Individual Policies|
|Insures the first spouse to pass||Yes||No||Yes|
|Insures the second spouse to pass||No||Yes||Yes|
Term or permanent life insurance
The next decision a married couple will make is what type of life insurance to purchase. The most popular options to consider are term, whole, universal, and variable.
A term life policy differs from the others because it doesn’t have a cash value component and has a set amount of years in which the policy will pay out a death benefit. Term life insurance can be thought of as pure life insurance. You are only paying for the current insurance on your life. The other policies (referred to as permanent policies) provide a savings component along with current insurance. The savings component provides a cash value in the policy which can be used for various purposes including paying for lifelong insurance protection.
The cash value of an insurance policy is separate from the death benefit. It is a part of your policy that can earn money through interest or investment growth that can be withdrawn, borrowed against, or used to fund the cost of life insurance when you get older and the cost is too great to get supplemental term insurance.
Term life insurance is best for a temporary insurance need. Your income only needs to be protected during your working years. Similarly, paying the costs of rearing children generally only lasts until college is completed. These are temporary needs and term life insurance is cost-effective for this protection.
Term life insurance is usually sold with a fixed premium for the duration of the term. For instance, a 20-year term policy has a fixed term of 20 years. At the end of the term, the premium usually rises significantly. Oftentimes, term insurance policies are convertible to permanent policies without additional underwriting. This can be beneficial if your health has deteriorated at the end of the term. Generally, terms are available from 10 to 40 years.
Group term life insurance is a special type of term life insurance that you can buy through your employer in the form of an employee benefit. Some employers provide group term life insurance as a free benefit covering one or two times your salary.
Group term life is priced according to your age in five-year bands. For example, if you enrolled in the benefit at age 40, your premium would remain the same for five years, or until the age of 45. Once you hit the age of 46, the premium will rise. Group term life can be one of the cheapest options, but over a given term (such as 20 years), the overall price of regular term life insurance will usually be cheaper than group term. Another disadvantage of group term life insurance is that you lose it when you leave your employer.
Permanent insurance also has its uses. These policies can be designed to last a lifetime and can provide a legacy to heirs. They can also be useful for cases where your health is good now but may deteriorate in the future. Whole life insurance is often sold as a savings vehicle and can provide a very safe way to save money and generate non-taxable income. Permanent insurance products can be complex and it’s best to get the advice of an experienced financial advisor before purchasing one.
Below is a chart to describe the differences of each policy.
|Term Life Insurance||Permanent Life Insurance|
|Guaranteed cash value||No||Yes, for whole and universal policies|
|Market returns within the cash value||No||Yes, for variable policies|
|Flexible premium payments||No||Yes, for universal and variable policies|
|Coverage duration||Fixed||Life for whole policies and flexible for universal and variable policies|
Is life insurance for married couples more affordable?
Life insurance for married couples can be affordable, especially if you select term life insurance policies for each individual. Joint policies may calculate to be a higher premium than two individual term life policies put together. Check with an insurance broker to compare.
If you are in good health, do not smoke, and are in your 20s or 30s, a term life insurance policy will likely be affordable. When you purchase a life insurance policy, you enter into a contract between you and the insurance company. In general, as long as you pay the premium, the insurer promises to pay a death benefit to your beneficiaries should you pass away.
Factors that a life insurance company may consider when calculating your premium are age, sex, medical history, occupation, and hobbies. Females often get lower premiums than males because of higher life longevity and because women are considered a lower risk than men.
The best way to manage the cost of life insurance is to get a quote from several different companies. Underwriting varies greatly between different insurance companies and the same policy could be twice as much with one company than the other. An insurance broker is a special type of insurance agent that represents several insurance companies at one time. Using a broker may be able to save you time by getting multiple quotes through one source.
Who can be listed as a beneficiary?
A person or entity can be named as the beneficiary of your estate. This includes your spouse, children, relatives, family, trust, estate, charity, and so forth. Death benefits from a life insurance policy typically pass income tax-free to the beneficiary.
If you name a child a beneficiary and they are still a minor upon receiving the life insurance death benefit, those proceeds may go into the care of the child’s legal guardian for the benefit of that child. An option around this is to name a custodian under the Uniform Gift to Minors Act within the beneficiary form. Another option is to establish a minor trust fund within your estate plan to provide further protection and guidance for those funds. Speak with an attorney to learn more.
If you don’t name a beneficiary on your life insurance, the insurance company may have a procedure they follow to see who gets the death benefit. This may be the owner of the policy (if different from the decedent) or the decedent’s estate.
If your estate receives the death benefit, the proceeds will have to go to probate to determine how your funds get dispersed. This can be time-consuming and costly. It is rare for there to be a reason not to name a beneficiary, so it’s best to do so right away.
How much life insurance do we need?
More often than not, married couples need life insurance. As discussed, reasons may include protecting future income, protecting future expenditures, paying off debt, and more. Therefore, when it’s time to select your coverage, you will need to determine how much you need.
Two ways to calculate your insurance need are the future earnings multiplier and the DIME method.
The future earnings multiplier simply multiplies the income you are protecting by the number of years you are trying to protect it. For example, let’s say one spouse makes $80,000/yr, and they have a child who is eight years old. They may want to provide insurance until the child is 18. Their calculation looks like this: $80,000 x 10 years = $800,000.
You can also use this method if you are the primary caretaker. If the primary caretaker’s jobs (daycare, meal prep, house cleaning, etc.) equate to $55,000/yr in saved expenditures, multiply the number of years you need to protect by that annual expense figure.
The second option to calculate your insurance need is referred to as the DIME method. This method requires you to calculate your needs more granularly. The acronym is as follows:
- Debt and Final Expenses – outstanding debt and funeral costs; plus
- Income – the amount of income your loved ones will depend on for their future needs; plus
- Mortgage – the amount of mortgage left to pay on your home; plus
- Education – the amount you wish to set aside for your children’s educational needs
You should always consider inflation when deciding on your insurance needs. Especially with inexpensive term insurance, it’s often better to get more insurance to ensure your family is protected when prices rise.
Regardless of how you calculate your insurance need, it’s not a perfect science. The ultimate goal is to put enough coverage in place to protect your loved ones.