Term Life Versus Whole Life
Things change when you gain a spouse, and in some cases, so should your life insurance. Insurance experts often believe that marriage affects life insurance coverage needs. This is primarily because term life can provide a hefty amount of coverage ranging from $10,000 to $150,000 at an affordable rate. And if your financial situation changes, term life can always be converted to a whole life policy.
You’ve finished opening your wedding gifts – and have one blender too many. The caterer’s been paid and you’re still recovering from the week-long honeymoon in the Caribbean, so now what? You might want to take a look at your life insurance coverage.
Whole life can provide a fixed premium (meaning it doesn’t increase every year with age) because it covers you for a lifetime. In addition to this, some whole life policies offer a cash value component that you can borrow against in the event that you need a loan for a house or would like to save money for retirement.
“Marriage is a good reason to convert a term policy to whole life, but most term life policies have conversion provisions that policyholders should look out for,” explains James Hunt, a life insurance actuary and former Vermont insurance commissioner. “Some can only be converted in the first couple years during the life of the policy and if you don’t convert during that period, you may lose the option.”
Hunt adds that the type of life insurance a married couple should buy all depends on the couple’s income, especially if one spouse stays home and the other one works.
“We would certainly suggest married folks should consider a large death benefit especially if they have lots of draws on their income such as housing and loan debt,” recommends Brian Ashe, a spokesperson for the Life and Health Insurance Foundation for Education. “With term they can get the largest bang for their buck. Later on, they might want to look into getting a considerable amount of whole life insurance or converting their term policy to some form of permanent life insurance as soon as they are financially capable, especially if they plan to start a family.”
Some critics believe you should buy term and invest the difference elsewhere.
“I would be cautious about converting to whole life because it’s coverage for life and more expensive, with term you would pay far less in premium and have the option to continue coverage,” said Hunt. “They should be thinking about the initial cost of whole life coverage and then figure out if that money would be better invested in tax-free retirement accounts such as 401(k) plans and IRAs. There are a lot of options to consider given each individual need.”
Update Your Current Life Insurance Coverage
Most often, when you’re married, you start to build assets together. Life insurance not only pays for funeral expenses in the event of your death but also provides a steady stream of income to your surviving spouse; it can also be used for a down payment on a home or help pay for your children’s college tuition.
Hunt says it’s a safe practice to compare your current term life policy against other insurance products on the market.
“Marriage is a particularly good time to check out what you have and compare it against what’s out there,” said Hunt. “There are many products that can be customized to your needs with varying costs.”
What Can Happen If You Don’t Specify Beneficiary Designations?
If you think divorce is messy, try the legal repercussions that come with disputing a beneficiary on a life insurance policy.
“If there is any major change in their lives or the lives of their beneficiaries the policyholder needs to reflect those changes in the policy while they’re still alive,” said Eric Matlin, an estate planning lawyer with Matlin & Associates, P.C. in Northbrook, Ill. “If something should happen to the primary beneficiary, they should also make sure they have a contingent beneficiary as a backup to make certain the benefit is set-up correctly with the insurance company so the money goes to the right person or persons.”
A legal battle in court could persist for years and if your dependents need the money to pay for funeral expenses or to provide income to your household, this could leave your loved ones in desperate financial straits.
“If there is a tax reason behind setting up a trust, or its part of a divorce settlement, the divorcing couple may be required by the courts to set up an irrevocable trust where the proceeds would be taken out of the taxable estate of the dead person. Often when there is a divorce, the former spouse doesn’t trust that their ex will keep the life insurance on them in force.”
Matlin adds that if a policyholder sets up a revocable trust, the terms and conditions of the trust can be changed during their lifetime. But once they die, it becomes irrevocable.
“This can also be used to prevent a dispute caused by any ambiguities that may arise in the contract that designates a beneficiary,” said Matlin.
Matlin says one of the more common reasons a policyholder sets up a trust is because they don’t want to give a lump sum of money to a beneficiary who can’t really handle it.
“If an adult beneficiary has a history of being immature with money, the policyholder can have a separate trustee dole out the money to them under certain terms and conditions,” Matlin explains. “The policyholder should determine what their goals are for the benefit and talk to a lawyer to put those terms into legalese.”
Following a divorce, there is always a possibility that the policyholder never got around to changing the beneficiary on their life insurance policy and inadvertently ends up leaving the death benefit to their former spouse.
“One of the worst things that can happen is making the former spouse the beneficiary to their estate. Going through probate isn’t that horrible, but it’s a public process and it opens the door to anybody who wants to disrupt the process such as a long lost relative,” said Matlin. “If you don’t have your favorite daughter as the contingent beneficiary on the policy, that money could go to the son that you haven’t seen or heard from in 20 years.”
Changing the beneficiary on your policy is doubly important if you marry for the second time. When you purchase life insurance, only you as the policyholder can change the beneficiary. Your new spouse should be included on any current life insurance policies you have.