In-Laws And Life Insurance: Who Benefits From A Child's Policy?

Life insurance is a complex topic, and when it comes to the question of whether in-laws can have life insurance on their married child, the answer is yes – with some conditions. The key factor is insurable interest, which means that the insured's death would result in financial loss for the beneficiary. In the case of a married child, their death could result in the loss of financial support for their children, and so in-laws may be able to demonstrate insurable interest. However, the married child's consent and cooperation are typically required, and the in-laws must be able to prove their relationship and financial dependence. Additionally, community property states have specific laws regarding spousal consent and beneficiary designations that could impact the in-laws' ability to take out a policy on their married child.

Joint vs. separate life insurance policies

In-laws can take out a life insurance policy on their married child, as long as they can demonstrate an "insurable interest". This means that they would suffer a serious financial loss if their child were to die. However, this would require the knowledge and cooperation of the married child.

Now, here is an overview of joint vs. separate life insurance policies:

Joint Life Insurance Policies

Joint life insurance policies cover two people, usually a married couple, under one policy. They are typically more affordable than purchasing two separate policies and provide a single death benefit paid out after the first or both people die. There are two types of joint life insurance policies: first-to-die and second-to-die (or survivorship) policies.

First-to-Die Policy

• Payout: The death benefit is paid out when the first person dies.
• Use case: This type of policy is often used to cover funeral expenses, debts, or income replacement, providing financial security for the surviving spouse.
• Pros: More affordable than separate policies; simplifies administration; useful for estate planning.
• Cons: Coverage ends after the first death, leaving the surviving spouse uninsured; may be complicated if the relationship status changes (e.g., divorce); may be more expensive if one person has health issues.

Second-to-Die Policy

• Payout: The death benefit is paid out only after both spouses have passed away.
• Use case: Typically used in estate planning to provide financial support to beneficiaries, such as children, and to help pay estate taxes and inheritance taxes.
• Pros: More affordable than separate policies; useful for estate planning and providing financial support to beneficiaries.
• Cons: Single payout structure might not fit all needs; coverage ends after the first death; may be complicated to manage if the relationship status changes.

Separate Life Insurance Policies

Separate life insurance policies cover only one individual and pay out a death benefit if the insured person passes away while the policy is in force. There are two main types: term and permanent policies.

Term Life Insurance

• Coverage: Provides coverage for a set period, usually 10 to 30 years.
• Pros: More affordable, ideal for temporary needs like covering a mortgage or supporting children.
• Cons: Does not build cash value, only provides coverage for a specific term.

Permanent Life Insurance

• Coverage: Provides lifetime coverage and includes a cash value component that grows over time.
• Pros: Offers long-term financial security and benefits for estate planning.
• Cons: More expensive than term life insurance; some policies may mature at a certain age, typically between 90 and 121.

Joint vs. Separate Life Insurance: Key Considerations

When deciding between joint and separate life insurance policies, consider the following:

• Cost: Joint life insurance policies are generally more affordable than purchasing two separate policies.
• Flexibility: Separate policies offer greater flexibility, allowing each spouse to choose different policy types and coverage amounts.
• Management: Joint policies simplify management with only one policy to administer.
• Coverage: Separate policies allow for higher coverage amounts per individual.
• Relationship status: If the relationship status changes (e.g., divorce), managing a joint policy may become complicated.
• Health status: If one spouse has health issues, separate policies may be preferable as joint policies could increase costs for the healthier spouse.
• Estate planning: Joint policies can be useful for estate planning, especially for wealthy couples, as the death benefit can be used to pay estate taxes and provide financial support to beneficiaries.

Ultimately, the decision between joint and separate life insurance policies depends on the couple's unique circumstances, financial goals, and preferences. Consulting a financial advisor or insurance professional is recommended to make an informed decision.

First-to-die vs. second-to-die policies

Life insurance is a crucial financial decision for married couples, offering financial security and peace of mind. When it comes to joint life insurance policies, there are two main types: first-to-die and second-to-die policies. Here's a detailed comparison of these two options:

First-to-Die Policies

First-to-die policies, as the name suggests, are designed to provide a death benefit payout to the surviving spouse after the first spouse passes away. This type of policy ensures that the surviving spouse receives financial support to maintain their standard of living and cover any debts or expenses. It is ideal for couples where one partner is the primary earner or if they share debts such as a mortgage or car payments. Additionally, it helps protect the future of their children by ensuring financial stability in the event of a tragedy. However, it's important to note that the second spouse is no longer covered after the first death, and the policy may become complicated to manage in case of divorce.

Second-to-Die Policies

Second-to-die policies, also known as survivorship policies, are designed to provide a death benefit to the beneficiaries, usually the children or heirs, only after both spouses have passed away. These policies are often used for estate planning purposes, helping to fund an irrevocable life insurance trust (ILIT) and reduce the tax burden on heirs. Since the benefits are paid out after both spouses' deaths, the premiums are typically lower than individual policies, making it a cost-effective option for couples. Second-to-die policies are ideal for wealthier families where the death of one spouse would not cause financial strain, as well as for couples with special needs children or medical conditions that make individual coverage challenging. However, one drawback is that the surviving spouse does not receive any benefits after the first death, which may be necessary for maintaining their standard of living.

In summary, first-to-die policies offer immediate financial protection to the surviving spouse, while second-to-die policies focus on providing benefits to heirs after both spouses have passed away, often as a tool for estate planning and tax reduction. The choice between the two depends on the couple's unique circumstances, financial goals, and the level of protection they seek for their loved ones.

When to take out life insurance for someone else

Taking out life insurance for someone else is a big decision and there are a few things to consider before doing so. The first is that you must have a financial stake in the person's life. This means that you rely on them financially and would suffer a loss if they were to pass away. The second is that the person being insured must consent to the policy and be involved in the application process. This includes answering questions and undergoing a medical exam.

Your spouse or life partner

If you and your spouse/partner rely on each other financially, taking out a life insurance policy on them can provide peace of mind and financial protection. This is especially important if one partner is the primary earner or if you have shared debts such as a mortgage, car payments, or student loans.

Your parents

If you rely on your parents for financial support or expect to be responsible for their final expenses, taking out a life insurance policy on them can be beneficial. Some life insurance plans can also help cover funeral costs.

Your child

While you may not rely on your child for financial support, taking out a life insurance policy on them can guarantee their future insurability, especially if they have a known health issue or are at risk of developing one.

Your business partner

If you own a business with someone, their sudden death could leave your venture in a difficult position. Taking out a life insurance policy on your business partner can help protect your business and give you time to find a replacement.

A key employee

If you own a business, you can take out what is known as key person or key employee insurance to insure an employee who is crucial to the business. This can provide financial protection and give you time to find a replacement if the employee passes away.

Your former spouse

If you receive spousal or child support payments from your ex-spouse, you may want to consider taking out a life insurance policy on them. This can provide financial protection in case they pass away and the support payments stop.

It's important to note that you cannot take out a life insurance policy on just anyone. The person you wish to insure must consent and there must be an insurable interest, meaning their death would cause you financial hardship. Additionally, separate policies may be required for different relationships, and joint policies may only be available for married couples.

Proving insurable interest

• Family relationship: If the insurable interest is based on a family relationship, such as a spouse or child, providing evidence of this relationship, such as marriage certificates or birth certificates, may be required. The law allows insurable interest on the presumption that a personal connection makes the family member more valuable alive than dead.
• Financial dependency: If the insurable interest is rooted in financial dependency, documentation of the financial connection may be required. This could include financial statements, tax records, or other proof of dependency.
• Business partnership: In the case of business partners, documentation of the business organisation, the role of the insured person within the business, and the financial implications of their death may be necessary.
• Creditor-debtor relationship: Creditors seeking insurance on a debtor may need to provide evidence of the debt and their financial interest in the insured individual's life, such as loan agreements or financial contracts.
• Legal requirements: In cases where insurable interest is legally mandated, such as court-ordered life insurance for alimony or child support, the relevant legal documents and court orders may serve as proof.

It is important to note that the specific methods and requirements for proving insurable interest may vary depending on the jurisdiction and the insurance company. Therefore, it is crucial to work closely with the insurance company during the application process to understand their specific criteria for establishing insurable interest.

Community property states and beneficiary designations

In the US, nine states have community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska, Florida, Kentucky, Tennessee, and South Dakota allow spouses to choose certain assets as community property or enter into a community property arrangement.

In community property states, any income and any real or personal property acquired by either spouse during a marriage are considered community property and, thus, belong to both partners of the marriage. This includes all money earned and property acquired during the marriage. In these states, spouses own (and owe) everything equally, regardless of who earns or spends the income.

Life insurance death benefits and cash value fall under community property laws. This means that, in community property states, both spouses have an equal claim on the assets and liabilities of a life insurance policy. If community income is used to pay the premiums of a life insurance policy, then parts of the policy could be both separate and community property.

However, there are exceptions to community property. Exceptions include assets acquired before marriage, after separation, or in a non-community property state, as well as gifts, inheritances, and anything protected under a prenuptial or postnuptial agreement.

Frequently asked questions