Spouse Insurance: What's Dependent Life Insurance?

Dependent life insurance is a type of life insurance that pays a death benefit to the policyholder if a covered dependent, such as a spouse or child, passes away during the policy term. It is often provided by employers or through joint life insurance policies. It can also be purchased as a standalone policy or an add-on to a traditional insurance policy. The death benefit is typically designed to cover final expenses, such as funeral costs and travel to the funeral, so the payouts tend to be smaller.

What is dependent life spouse insurance?

Dependent life spouse insurance is a type of life insurance that pays a death benefit to the policyholder if their spouse or partner passes away during the policy term. It is typically purchased by the spouse or partner who is the primary income earner in the relationship.

Dependent life insurance is often offered as part of a benefits package through an employer, but it can also be purchased as a standalone policy or added to an existing individual life insurance policy. It is usually less expensive than an individual policy because it is offered in smaller amounts and often includes limited customisation.

The death benefit from dependent life insurance is intended to cover final expenses, such as funeral costs and travel to the funeral. It can also help to cover the cost of household contributions made by a non-income-earning spouse, such as childcare, home upkeep, and cooking.

Dependent life insurance policies for spouses and partners often include a conversion option. For example, if the couple divorces, the policy can be converted to an individual life insurance policy without the spouse or partner needing to prove their insurability.

The amount of coverage available for a dependent spouse or partner is typically lower than that of an individual policy. Coverage limits are usually higher for spouses and partners than for children, and premiums tend to increase as the spouse or partner ages.

How does it work?

Dependent life insurance is a type of life insurance that pays a death benefit to the policyholder if a covered dependent, such as a spouse or child, passes away during the policy term. It is typically purchased through an employer, but it can also be bought as a standalone policy or an add-on to an existing policy.

Dependent life insurance policies are usually offered as part of a benefits package by an employer. They can be purchased during open enrolment or after qualifying events, such as getting married. The employee is automatically designated as the beneficiary, so if a covered dependent dies, the employee receives the policy's face value as the death benefit.

Dependent life insurance policies are typically offered in increments of a dollar amount, such as $2,000 or $10,000. The maximum amount of coverage per eligible dependent varies, but it is usually higher for spouses than for children. The cost of the policy depends on the amount of coverage and the age of the dependent. For example, a plan might let you purchase up to $10,000 of dependent insurance per child, in increments of $2,000. The monthly premium for this coverage might be $1.50 per month.

Dependent life insurance policies are often limited to covering funeral and burial expenses, with policy limits usually within the range of the average cost of a funeral with a viewing and burial, which is $7,848 according to the National Funeral Directors Association.

There are two main types of dependent life insurance: term life insurance and permanent life insurance. Term life insurance offers temporary coverage, usually between ten and 30 years. If your dependent passes away during the term, you will receive a death benefit. If they outlive the policy, you won't receive any coverage, but some policies allow you to convert term to whole life insurance. Permanent life insurance provides lifelong coverage and comes with a cash value component, which allows you to earn interest on a portion of your premiums. When your dependent passes away, you receive the death benefit plus the cash value earnings on the policy.

Dependent life insurance policies for spouses often come with a conversion option. This means that if the policyholder retires, quits, or is terminated from their job, or if they divorce their spouse, the spouse can keep their life insurance coverage without proving insurability.

Who can qualify as a dependent?

Family members who rely on your income may qualify as life insurance dependents. This includes a spouse, any children for whom you are a legal guardian, and older parents if you provide care and financial assistance for them. The definition of a spouse usually includes anyone the state recognises as your spouse, including a common-law spouse, provided it is recognised in your state. Biological children, stepchildren, and legally adopted children may also be covered, and in some cases, children over the age of 26 with disabilities may be eligible for continued coverage.

Dependent life insurance offers financial protection to cover end-of-life expenses, helping to relieve financial stress during grieving. It can also help to account for the value of a non-income-earning spouse's contributions to the home, such as childcare, home upkeep, and cooking. However, it is important to weigh the potential drawbacks. For example, dependent life insurance tends to have small death benefits, and it may be hard to customise coverage to your needs. Additionally, if you obtain dependent life insurance through your employer, you may lose the coverage if you leave your job.

Who qualifies as a dependent?

The definition of a dependent varies depending on the insurance company and the type of plan. However, there are some general guidelines that can help you determine who may be eligible for dependent life insurance coverage.

• Spouses: For dependent life insurance purposes, a spouse is typically defined broadly and includes anyone recognised by state law as your spouse, including common-law spouses. However, a domestic partner may not be recognised as a qualifying spouse, depending on the specific group plan.
• Children: Qualified children usually include biological children, stepchildren, legally adopted children, and children under your legal guardianship. Children are often only insurable until they reach a certain age, typically 26, with some exceptions for children with disabilities or unique needs.
• Other adult dependents: In some cases, other adult dependents such as elderly parents or domestic partners may qualify as dependents. However, this is less common, and you would need to review the terms of your specific plan. These dependents typically need to live with you, be unmarried, and be financially dependent on you.
• Military dependents: If you are a member of the military or qualify for Servicemembers Group Life Insurance (SGLI), your dependents may be eligible for coverage through the Family Servicemembers Group Life Insurance (FSGLI) program. This program covers spouses and dependent children under specific age and student status requirements.

It is important to carefully review the specific rules and requirements of your group life insurance plan to determine who qualifies as a dependent and what coverage options are available to you. Each plan may have different definitions and eligibility criteria for dependents.

What are the pros and cons?

Dependent life insurance is a type of insurance that pays a death benefit to the policyholder if a covered dependent, such as a spouse or child, passes away. It is typically offered through workplace group plans, with premiums automatically deducted from the employee's paycheck.

Pros

• Financial protection for end-of-life expenses: This type of insurance can help cover funeral costs and other final expenses, relieving financial stress during a difficult time.
• Cost-effectiveness: Dependent life insurance tends to be more affordable than individual life insurance policies, making it accessible to many families.
• Convenience: These policies are often available through employers, making them easy to obtain and manage.
• No medical exams: Dependent life insurance usually does not require a medical exam, making the application process faster and more accessible for those with health issues.

Cons

• Limited coverage: Dependent life insurance typically has small death benefits to cover final expenses, so it may not be sufficient for replacing substantial income.
• Limited accessibility: These policies are often tied to workplace benefits plans, so they may be difficult to customise to individual needs or access for self-employed or unemployed individuals.
• Potential loss of coverage: Since most of these policies are provided by employers, you may lose coverage if you change jobs or retire.

Is the death benefit taxable?

The death benefit paid out by a dependent life insurance policy may not be taxable if you pay all the premiums yourself or if your employer pays for part of the coverage. However, if your employer pays for a greater amount of coverage than $2,000 per dependent, the full amount of the cost of the policy is often taxable. In such cases, the Internal Revenue Service (IRS) typically treats amounts over the $2,000 cutoff as taxable income, referred to as "imputed income".

The taxability of the death benefit depends on the specific circumstances of the policy and the situation, so it is always recommended to consult a financial or tax advisor for personalised advice.

It is important to note that while the death benefit itself may not be taxable, any interest earned on the benefit may be taxable. Additionally, if the death benefit is paid out in installments that include interest, the interest portion will be taxable.

Furthermore, if the death benefit is paid to the estate of the insured rather than a named beneficiary, it may be subject to federal or state estate tax if the estate exceeds the estate tax exemption limit.

Frequently asked questions