Buying Life Insurance for Spouse: What to Know

In short, the answer is yes. Whether or not your spouse contributes to the household income, taking out a life insurance policy for them is probably a good idea.

Generally, both partners work to support a family’s expenses. 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, having them covered is just as important as it would be if they had a full-time job. Should the unthinkable happen, you must pay someone to perform your partner’s tasks 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 weekly or over $31,000 yearly. If you multiply the child-care expense over several years, it becomes clear why buying coverage for a stay-at-home parent is a wise decision.

Why Life Insurance is Important for Married Couples

Life insurance is a crucial component of financial planning for married couples, offering a safety net that ensures financial stability in the face of unforeseen events. In the event of a spouse's untimely death, the surviving partner may face significant financial challenges, including loss of income, outstanding debts, and ongoing living expenses. A life insurance policy provides a death benefit that can help cover these costs, allowing the surviving spouse to maintain their standard of living without the added burden of financial strain.

Additionally, life insurance can be instrumental in estate planning. For couples with significant assets, a policy can help offset potential estate taxes, ensuring that more of the estate is preserved for heirs. This is particularly relevant for those considering a joint life insurance policy, which cover both spouses and can be structured to pay out upon the death of the second spouse, providing funds to cover estate taxes or leave a legacy for beneficiaries.

Moreover, life insurance can provide for future expenses such as children's education or mortgage payments, offering peace of mind that long-term financial obligations will be met. By securing a life insurance policy, married couples can protect their family's financial future, ensuring that their loved ones are cared for even in their absence.

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, and the insurance company will require proof of this. That is to say, you will suffer financially if that person dies. To purchase a policy for another person, you must be able to demonstrate this to the insurer at the life insurance company.

Also, remember that the insured — the person on whose life you are taking out a life insurance policy — must sign the application. The only exception is when the insured is a minor.

The difference between a separate insurance policy and a joint life insurance policy

You can buy a separate life insurance policies or joint policy for each of you. The latter is usually cheaper, but having two separate life insurance policies will give you more flexibility.

Separate life insurance policies provide individual coverage, ensuring that each partner's unique health and lifestyle factors are considered, which can be beneficial if one partner has health issues that might affect premiums. This approach offers flexibility, as each policy can be tailored to the individual's specific needs and financial obligations.

On the other hand, joint life insurance policies cover both partners under a single life insurance policy, typically paying out upon the first death (first-to-die) or after both have passed away (second-to-die). Joint policies can be more cost-effective and are often used for estate planning purposes, such as providing for children or covering estate taxes. However, they may lack the flexibility of separate policies, especially if the couple's circumstances change, such as in the event of a divorce.

Therefore, it's essential for couples to assess their financial goals, health statuses, and future plans when deciding between separate and joint life insurance policies.

Separate 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 life insurance policies is not likely to reduce your insurance cost, but it offers more flexibility. For instance, if yours is a single-income household, you may want to take out a bigger life insurance policy on the primary earner’s life. Likewise, you may want to buy additional benefits, such as the accelerated death benefit rider.

A single-life insurance policy is easy to handle in the case of divorce. Both of you can simply continue to maintain your policy after separating.

Joint Life Insurance

A joint life insurance policy covers the lives of two or more people, but it pays out only once. Most joint life insurance policies are permanent, which means they last your entire life, provided you pay premiums. However, some life insurers also offer term plans, usually 10 or 20 years.

If you favor a joint policy, it would be best to purchase one with the ‘separation benefit’ feature. These policies can be split in the case of divorce. Otherwise, if you and your spouse ever decide to call it quits, the coverage would have to be canceled, or 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 insured person. Once the insurer issues the benefit, the coverage ends. The surviving spouse must seek a new policy if they still need coverage.

Income replacement and debt management are two primary reasons couples buy a first-to-die policy. The surviving spouse can use the policy proceeds to replace the lost income. This policy works well as an income replacement tool when both partners have similar incomes.

If your spouse is not the primary earner, using this 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 repay the mortgage and other debts.

Joint last-to-die life insurance

A last-to-die policy provides life insurance coverage that pays out after the second spouse’s death. Most couples name their children as beneficiaries, but you can 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 policy proceeds to pay estate taxes and other legal fees associated with estate distribution. You may also want to consider whether you’ll 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 an 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

Benefits of Joint Life Insurance Policies

A joint life insurance policy offer several benefits for married couples. They can be a more affordable option initially, and they usually pay out on the first death, providing the surviving spouse with financial support when needed. Joint policies also allow couples to take coverage under a separate life insurance policies, a less expensive way of seeking life insurance. Additionally, joint policies often have lower policy fees, which can be easier to manage, as there is only one contract to keep track of.

What is a 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.

When determining the life insurance needs for a non-working spouse, factors such as medical history, number of children, and cost of living should be considered. While non-working partners may not contribute to the household income, they perform essential 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?

No one-size-fits-all answer 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

Life Insurance for Older Spouses

Shopping for life insurance for an older spouse can be straightforward once you know the ropes. It’s about ensuring your loved one is financially secure, whatever comes their way. When considering life insurance for an older spouse, consider how premiums might increase with age and what terms are most beneficial as you both grow older.

Covering medical expenses, ensuring financial stability, or leaving a legacy are all important considerations. Life insurance companies have become more accommodating to older spouses, and many options are available to protect both partners.

Supplemental Spouse Life Insurance

If your employer offers group insurance, you may be able to buy supplemental spouse life insurance from a life insurance company to cover the life of your spouse. Many employers provide supplemental coverage in addition to basic coverage, which is 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. Do not delay once you and your partner decide to get life insurance, do not delay. Life insurance premiums increase by 8-10% on average for every year you postpone buying.

Buying life insurance as a couple is the same as buying insurance for singles. The only difference is that you and your partner must first decide whether a joint life insurance 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.

Tips for Discussing Life Insurance with Your Spouse

Talking about life insurance with your spouse might not be the most exciting conversation, but approaching the conversation with care and consideration can strengthen your partnership. Discussing life insurance can help ensure that you’re both on the same page about your family’s financial security. The goal is to protect what matters most to both of you. Consider your financial goals, debt, and dependents when discussing life insurance. Being open and honest about your financial situation and wishes for the future is essential.

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Deciding how much insurance is needed

While it is impossible to ascertain how much insurance you need right down to the penny, there are ways to come up with a reasonable estimate. A rule of thumb is to have coverage at least 10 times 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 stay-at-home partner’s labor.

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 loans, credit card loans, 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 life insurance 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 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 lifetime. 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 your situation is special, you may want to consider permanent life insurance instead.

Choose the right beneficiary for you and your spouse

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 can choose anyone. You can also name more than one beneficiary.

How to pick the right insurer for you and your spouse

Whether you and your spouse want a joint 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 cash 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 or separate life policy 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.

Updating Your Life Insurance Policies After Life Changes

Life’s big changes mean it’s time to revisit your life insurance. Whether you’re tying the knot or going through a divorce, updating your life insurance policy is crucial. Add your spouse to your existing term insurance policy by updating your current terms to include both parties.

Adjust your policy after a divorce by ensuring that your policy is the best life insurance policy that matches your life stage and responsibilities. It’s essential to review your coverage details together to ensure it meets both of your needs. Updating your life insurance policy at a life insurance company can provide financial security to a partner and help maintain their standard of living.

Conclusion

Life insurance is a vital component of financial planning for spouses, offering a safety net that ensures financial stability in the face of unforeseen events. By securing appropriate coverage, couples can protect each other from potential financial hardships arising from the loss of a partner. This protection extends to covering daily living expenses, paying off debts, and safeguarding future plans such as children's education or retirement.

Additionally, life insurance can play a crucial role in estate planning, helping to manage taxes and preserve assets for heirs. By thoughtfully selecting and structuring life insurance policies, spouses can provide peace of mind and financial security for their loved ones, ensuring that their shared goals and commitments are upheld, even in the face of life's uncertainties.

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. Book a call with a licensed advisor today.