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  • How marriage affects life insurance coverage
  • December 23, 2013
  • marriage insuranceBy

    You’ve finished opening your wedding gifts and have one blender too many. The caterer has 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.

    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 term life may be the better option for newlyweds who are just starting out. 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.

    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.

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