Life Insurance: Adding Your Spouse As A Beneficiary

Life insurance is an important part of financial planning as it helps your loved ones maintain their quality of life in the event of your death. Married couples can choose between a joint life insurance policy or separate life insurance policies. A joint policy covers both spouses, while a separate policy will only cover one spouse. Both options have their pros and cons, so it's important to weigh them carefully before making a decision. Joint policies, for example, may lower overall life insurance costs but offer less flexibility and can be complicated to manage if the marriage ends. Separate policies, on the other hand, offer greater flexibility and customization but are typically more expensive. Ultimately, the best policy depends on the couple's financial situation, coverage needs, and personal preferences.

Joint vs. separate life insurance policies

Overview

Couples can choose to take out a joint life insurance policy or their own separate policies. A joint life insurance policy covers two people—typically spouses or domestic partners—but the insurance company only pays a benefit when one spouse dies.

Joint Life Insurance Policies

Also known as a dual life insurance policy, a joint life insurance policy covers both spouses. If you’d like to save money on life insurance and protect your assets from taxes after you pass away, a joint policy may be a good option.

There are two types of joint policies: first-to-die policies and second-to-die policies. With first-to-die joint life insurance, the surviving spouse will collect the death benefit after the first spouse dies. A second-to-die or survivorship policy is when the beneficiaries receive the death benefit once both spouses pass away.

Separate Life Insurance Policies

A separate life insurance policy, or single life insurance policy, will only cover one spouse. If that spouse passes away, it will pay out a death benefit to the surviving partner. You can choose from a term life insurance policy that provides coverage for a set time period, or a whole life policy that offers lifelong protection. By investing in separate life insurance policies, each spouse can focus on their unique needs.

Joint vs. Separate: Which is Better?

The best type of life insurance cover will depend on your circumstances. Many people will find that a joint life insurance policy is the best option for them because the monthly premiums are typically low and it’s easy to manage one policy.

Some couples may choose to take out a joint policy if they are relatively young and it’s unlikely both policyholders will pass away, so the survivor could take out another policy later on if needed.

However, others will appreciate the flexibility and added protection of taking out two separate life insurance policies. For many, the price difference between the two policies will be a deciding factor. Because two separate policies offer more cover, this will often be a more expensive approach. But the price difference can be minimal and make the difference between financial problems and a secure future for dependents.

First-to-die and second-to-die joint life insurance policies

First-to-die and second-to-die are the two types of joint life insurance policies.

First-to-die

With this type of joint life insurance, the policy pays out as soon as the first person dies, with the surviving spouse receiving the death benefit. The primary goal of this type of joint life insurance is similar to individual life insurance. It is often used to compensate for the lost income of a spouse or partner who dies. With the loss of one individual in a dual-income household, first-to-die policies pay out to the survivor so that they have finances to rely on in their time of need.

Second-to-die

Second-to-die policies make their payout after both of the insured persons have died. This benefit is paid to their beneficiaries. Unlike first-to-die, this type cannot provide a payout to either of the two people who are covered by the plan. Second-to-die, instead, is geared towards their beneficiaries. One of the upsides of doing it this way, instead of using two individual life insurance plans, is savings. You not only save money on the premiums, but the death benefits are also still tax-free.

In short, first-to-die is designed to help the surviving member of the insured couple, while second-to-die is purely for beneficiaries and cannot pay out to the two who are insured.

Term and permanent life insurance policies

Term life insurance is a cheaper option that covers you for a set period, such as 10, 15, 20, or 30 years. It is a good choice if you only want coverage for a specific time, for example, until your children are financially independent. It is also a good option if you want the most affordable coverage, especially if you are young and healthy.

Term life insurance is simple: you pay premiums in exchange for a death benefit that will be paid out if you die during the term. Most policies are level term life, meaning the death benefit and premiums stay the same throughout the term. There are also decreasing term life policies, where the death benefit gets smaller over time while premiums remain the same.

Whole life insurance is the most common type of permanent life insurance and typically costs more than term life insurance. This is because the coverage lasts much longer, often until the age of 90, 100, or 120. Whole life insurance also has a cash value component that grows at a guaranteed rate set by the insurer. This cash value can be borrowed against or withdrawn.

Whole life insurance policies are often "participating" policies, meaning they may earn dividends based on the company's financial performance. These dividends can be used to boost the policy's cash value, among other options.

Permanent life insurance policies combine a death benefit with a savings component. The savings component earns interest on a tax-deferred basis, and money can be withdrawn from the policy without taxation, up to the total of the premiums paid.

The four types of permanent life insurance policies are universal life, whole life, variable universal life, and variable life.

Group life insurance through your employer

The amount of coverage provided by group life insurance is typically determined by the employee's annual salary or position within the company. This can range from one to two times the employee's annual salary. For example, if your salary is $50,000 per year, your employer might provide a group policy with a life insurance face amount of $50,000 or $100,000. This type of insurance is term life insurance, which remains in effect only for a specific length of time, usually while the employee remains employed by the company.

While group life insurance through your employer is a good starting point, it may not be sufficient to meet all your financial needs. The coverage is often not portable, meaning if you leave your job, you may lose the policy. Additionally, the coverage amounts tend to be low and may not be enough if you have dependents or significant financial obligations. It's important to consider your own financial situation and determine if you need additional coverage through a separate policy.

If you decide to supplement your group life insurance, you have several options. You may be able to buy additional coverage through your employer's group plan. Alternatively, you can purchase a separate individual term life policy or a permanent life policy. Term life insurance offers lower premiums but is only effective for a set period, while whole life policies tend to have higher premiums but remain in effect until your death and can provide a cash value component.

In summary, group life insurance through your employer can be a valuable benefit, especially if you don't have any other life insurance in place. However, it's important to assess your financial needs and consider supplementing it with additional coverage to ensure adequate protection for your spouse and dependents.

Spouse as a beneficiary

Yes, you can put your spouse as a beneficiary on your life insurance policy. In fact, most of the time, a spouse is the primary beneficiary on a life insurance policy. However, your spouse will not be automatically designated as your beneficiary, and you must specifically name them as such in your policy.

If you live in a community property state, your life insurance payout will automatically go to your spouse, even if you have named someone else as the beneficiary. This is because the state considers you and your spouse to be equal owners of all joint assets, including income earned during the marriage, property purchased with that money, and life insurance benefits. The community property states are:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Alaska and Tennessee are considered “opt-in states,” meaning spouses can decide to opt in and participate in the state’s community property laws.

If you do not live in a community property state, your spouse does not automatically receive the benefit. In some cases, a policyholder can name someone else as the beneficiary, such as their child, a relative, or another person besides their spouse.

Frequently asked questions