Life Insurance: Who Gets The Payout?

Life insurance is an important financial product that helps secure the future of your loved ones in case of your untimely demise. Married couples can choose between a joint life insurance policy or separate life insurance policies. While a joint life insurance policy will cover both spouses, a separate life insurance policy will only cover one spouse.

In most cases, a spouse is the primary beneficiary on a life insurance policy. However, in community property states, the policyholder's spouse is automatically considered the beneficiary. These states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, with Alaska and Tennessee being opt-in states.

Joint vs. separate life insurance plans

Life insurance for married couples can come in the form of separate or joint policies. While a single life insurance policy will only cover one spouse, a joint life insurance policy will protect both. Here are some of the pros and cons of each option.

Joint Life Insurance Policies

Also known as dual life insurance, a joint life insurance policy covers both spouses. This type of policy is a good option for couples looking to save money on life insurance and protect their assets from taxes after they pass away.

There are two types of joint policies: first-to-die and second-to-die. 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.

Pros of Joint Life Insurance Policies

• May lower overall life insurance costs
• Simplifies management with one policy
• Can be useful for estate planning and minimising taxes
• Provides financial security to the surviving spouse or beneficiary

Cons of Joint Life Insurance Policies

• Payout structure might not fit all needs (e.g. second-to-die only pays out after both spouses pass away)
• If the marriage ends, the policy may become complicated to manage
• Limited flexibility compared to individual policies
• Coverage may be less than individual policies for the same premium
• Second spouse no longer covered in a first-to-die scenario
• If one partner has health issues, the cost for the healthier spouse may be higher than individual coverage

Separate Life Insurance Policies

A single life insurance policy will cover only one individual and will pay out a death benefit to the surviving partner. There are two main types of individual life insurance policies: term and permanent. Term policies cover you for a set period of time, usually 10 to 30 years. Permanent policies are designed to last your entire life, but some may mature at a certain age, typically between 90 and 121. A separate life insurance policy is not tied to your marital status.

Pros of Separate Life Insurance Policies

• Greater flexibility in choosing different types of policies
• Can be tailored to individual needs and financial goals
• Each spouse has their own coverage, unaffected by changes in marital status
• Allows for higher coverage amounts per individual

Cons of Separate Life Insurance Policies

• Typically more expensive than a joint policy
• Requires managing multiple policies
• No potential cost savings from a combined policy
• Individual underwriting might be more stringent and vary per spouse

Spousal protection ownership structures

Individual Ownership

Individual ownership is a common structure, where an individual owns a life insurance policy on themselves and names their spouse as the beneficiary. This provides flexibility as the policyholder can change the beneficiary at any time. For example, if a couple divorces, the beneficiary can be changed from the ex-spouse to a child or another individual.

Cross-Ownership

With cross-ownership, each spouse owns a life insurance policy on the other and is also the beneficiary of the other's policy. This structure allows for the exchange of death benefits, ensuring financial protection for the surviving spouse. However, a potential pitfall is the "Goodman Triangle," which occurs when there are three separate parties to the policy: the owner, the insured, and the beneficiary. To avoid this, two of the three parties must be the same person, such as the insured and owner being the same person.

Life insurance for newlyweds

Newlyweds may want to consider purchasing life insurance to provide financial security for their spouse and any other family members should they pass away unexpectedly. Life insurance can help the surviving spouse to cover expenses such as mortgage payments, childcare, and funeral costs, and can also provide an income replacement.

There are two main types of life insurance: temporary or term life insurance, and permanent life insurance. Term life insurance offers a death benefit for a fixed amount of time, whereas permanent life insurance covers the insured for their entire life. Whole life insurance is the most straightforward form of permanent insurance, with fixed monthly or annual premiums for a guaranteed death benefit. Universal life insurance is a more flexible option, allowing the policyholder to adjust premium payments and death benefits. Variable universal life insurance gives the policyholder more control over their cash value by allowing them to allocate it toward market-driven subaccounts.

When deciding whether to purchase life insurance, it is important to consider your financial situation and goals. Newlyweds may want to insure themselves to cover any new or anticipated expenses, such as childcare, shared debts, or funeral expenses. It is also worth considering that the cost of life insurance is generally cheaper when the insured is young and healthy.

When purchasing life insurance, newlyweds have the option of obtaining separate life insurance policies or a joint life insurance policy. Separate policies allow each spouse to choose from a variety of options and tailor the coverage to their individual needs. Joint life insurance policies, on the other hand, cover both spouses under one policy and are generally cheaper than separate policies. However, joint policies offer less flexibility and can be complicated to manage if the marriage ends.

In conclusion, life insurance can provide financial security and peace of mind for newlyweds and their families. When deciding whether to purchase life insurance, it is important to consider your financial situation, goals, and the potential expenses you want to insure yourself against. Newlyweds should also weigh the benefits and drawbacks of separate versus joint life insurance policies before making a decision.

Community property states

In the United States, there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, both spouses are considered to own any income and assets acquired during the marriage. This includes life insurance policies, which are technically owned by both spouses.

In community property states, the policyholder's spouse is automatically considered the beneficiary of their life insurance policy. This means that, even if the policyholder names someone else as the beneficiary, the spouse will still receive a portion of the death benefit. The extent to which the life insurance is considered community property depends on the type of policy.

For term life insurance, the entire policy and its benefits are considered community property. Therefore, the surviving spouse would have the right to 50% of the benefits. The other half of the payout would go to the named beneficiary.

For permanent life insurance, such as whole or universal life insurance, the benefit is prorated when the insured passes away. The amount the surviving spouse is entitled to depends on how much the insured spent on the policy while married and would be prorated accordingly.

For example, let's say Partner A purchases a life insurance policy two years before marrying Partner B. For the first two years, Partner A uses their money to pay for the policy. Once they are married, Partner A continues to pay for the policy with income now considered community property. If Partner A passes away one year later, with a total of three years paid into the life insurance policy, Partner B would be entitled to half of one-third of the payout, or 16.6%. They only receive half of the prorated amount because the other half still belongs to Partner A and will be paid out to the named beneficiary.

Survivorship life insurance

There are two main types of survivorship life insurance: whole life insurance and universal life insurance. Whole life insurance has guaranteed premiums, cash value, and death benefits, making it a simple form of permanent life insurance. On the other hand, universal life insurance may have a cash value component that allows policyholders to access funds while they are still alive.

When considering survivorship life insurance, it is important to weigh the pros and cons and determine if it aligns with your financial goals and family situation. It is also recommended to consult a financial advisor or insurance professional to find the best coverage for your specific needs.

Frequently asked questions