Buy Life Insurance to Replace Spouse's Income
Insuring Your Spouse’s Income with Life Insurance
Can I Buy Life Insurance Protection to Replace My Spouse’s Income?
Yes, a spouse can buy life insurance on a husband or wife.
Many married couples buy life insurance on their spouse as a way of replacing their spouse’s income should he or she pass away.
In fact, buying life insurance to replace income is one of the most common reasons people choose to purchase life insurance protection.
If your spouse were to pass away, how would your family be able to pay their monthly bills, remain living in their home, afford to pay for food, clothing, insurance, medical bills, daycare, and the future cost of education for you children, among other things?
Whether you are a husband or wife, if your spouse contributes to your family’s income, and your family relies on that money, then you definitely need life insurance to help protect the financial security provided by your spouse’s income.
Insurable Interest and How it Works
What is Insurable Interest and How Does It Affect the Purchase of Life Insurance?
In order to purchase life insurance on someone else you need an Insurable Interest in that person.
Insurable Interest means you rely on the person for financial support, and/or you would suffer a financial loss should the person you wish to insure die.
Everyone has an insurable interest in their own spouse – Whether you rely on your spouse’s income for support, or you would pay to bury your spouse upon his or her death.
How Much Life Insurance Coverage to Buy
How Much Life Insurance Should I Buy to Replace My Spouse’s Income?
If your spouse passes away you may have the following thoughts:
- My spouse is the breadwinner. If he (she) dies and that money’s no longer coming in to our family each month, I don’t know how I would replace it.
- If my spouse dies, I will need money to pay off existing financial obligations, including the home loan, car loans, student debt, etc.
The Survivor’s Financial Responsibilities Left by Their Spouse
Many people are unaware that they are responsible for their spouse’s debt at the time of a spouse’s death.
That’s right, even if you were unaware your spouse took on large amounts of debt during your marriage, you are responsible for paying off those debts, upon the death of your spouse.
"All debts are due at the time of your death".
This means that if you are unable to pay your deceased spouse’s debt, creditors have the legal right to pursue legal action against you to pay them back for the money your spouse owed them.
Being left with a spouse’s outstanding debts, without the money to pay them off, is a common cause of bankruptcy in America.
Sad, but true. This situation applies to a mortgage loan, a car loan, outstanding medical bills, and any debt that is outstanding which your spouse owed at the time of passing.
This is why financial advisors advise purchasing a life insurance policy on your spouse and vice versa, as your family’s safety net, in case either of you die unexpectedly.
It’s not meant to make you better off financially, but allow survivors to maintain their standard of living, should their spouse die.
How Involved Will My Husband (or Wife) Be in the Application Process for Life Insurance?
You’ll want to make sure your spouse is on board with the purchase of life insurance on him or her.
Facing their mortality is not something that comes easy for most men. And, some people are not so trustful of doctors in general.
Let’s face it, many men avoid having a medical check-up until something’s wrong.
Your spouse should be willing to complete a free in-home physical including a blood and urine sample.
If not, there are non-medical options available for life insurance.
Will Your Spouse be Willing to Do a Phone Interview of Their Health History?
If your answer is "none of the above", then you’re likely going to be limited to a maximum of $25,000 in life insurance from a guaranteed issue policy that has no health exam required, and no health questions asked.
At minimum, your spouse will need to sign an application.
You can’t buy life insurance on a spouse without their knowledge.
Protecting Your Family from Loss of Future Income
A primary reason for purchasing life insurance ona spouse is to replace the loss of their future income.
For Example – You are a stay a home mom and your husband makes $6,000 dollars a month. After taxes, this is roughly $4,25000 a month take home.
In this situation, if your husband passed away, your family would be without the $4,250 dollars a month needed to pay utilities, put food on the table, put gas in the car, and continue to maintain your current standard of living.
You may also want to consider life insurance for your stay-at-home spouse, because it would be very costly to hire someone to do all of the things a stay-at-home spouse does to help maintain the household.
Buy Life Insurance Young, Get More Protection
and Pay Less for Your Policy
The younger you are when you buy a life insurance policy, the more years of potential income you’ll need to replace.
The amount of life insurance coverage you need is referred to as the "face value" of your insurance policy.
The younger you are when you purchase life insurance coverage, the lower your premiums will be, since the cost of insurance is based on mortality risk – how long you are expected to live.
Income Multipliers and Life Insurance
Insurance companies use "Income Multipliers" to help determine how much insurance you may purchase to replace income.
For example, an average 35-year-old has about 30 working years ahead of them.
As a result, an insurance company will allow someone in this age bracket to buy a policy that will replace thirty years of future income.
Let’s say you earn $50,000 annually and you are 35 years old.
In this example, you’re allowed to purchase up to $1,500,000 of life insurance coverage.
Now, that sounds like a lot of money, and yes, it is.
But, you have a lot to lose if your family’s "money stream" is no longer available to pay the bills each month, and provide for all of your family’s financial needs in the future.
If you are age 65-70, the insurance company will typically limit the amount of life insurance coverage you can purchase to around 5-10 times your annual income.
These guidelines can be somewhat flexible and vary from insurance company to insurance company.
Some life insurance carriers will also consider your spouse’s net worth, debts, and other sources of income, to determine how much insurance you may purchase.
Insurance to Protect Your Home Mortgage Loan
A majority of people buy insurance on their spouse for mortgage protection, protecting the family home.
Let’s say together you and your spouse owe $150,000 on your home, and you still have about 15 years left on your mortgage loan.
In this situation, if something happened to your income earning spouse, it’s likely it may be impossible for you to cover the bills and pay the mortgage on your one income, or no income at all.
In this scenario, you would want the life insurance policy to last at least as long as the mortgage loan (15 years) and cover the full mortgage amount outstanding ($150,000).
Life Insurance to Secure Paying for Your Child’s College Education
Purchasing insurance on your spouse can also be used to provide a college fund for children.
It can be really difficult to put away enough money every month for our children’s college funds after paying all the bills, but what if your household income is suddenly cut in half or even reduced to nothing at all should your spouse die?
To guarantee your kids are able to go to college, it’s very common for parents to purchase life insurance specifically for this purpose.
According to collegedata.com, as of February 2018, the average cost of a four-year undergraduate degree at a private university in the U.S.A. is currently $138,960. In the next 15 years, this number is expected to double.
To calculate the amount of life insurance coverage you would need and the appropriate length of your policy "term" (how long you need insurance), subtract the age of your youngest child from 23, which is the average age children graduate from college.
So, if you have two kids ages 4 and 6, subtract 4 from 23, which is 19.
That means nineteen is the minimum number of years you will need insurance, so you’ll want a 20-year term life policy for $400,000 of protection. This number is adjusted to reflect the rate of inflation – 5%.
This insurance policy will make sure that if you or your spouse pass away before your children graduate college, they will have enough money to finish their degrees and get a good start in life, without the financial burden of having to pay off student loans they needed to take out in order to attend college.
Calculating Insurance Coverage Amount and Length of Policy Term
There is a simple way to determine how much life insurance you need, and for how long you need coverage to last, to provide for your child's college education.
Subtract your youngest child’s age from 23.
Double the current cost of a college education, and add inflation, to get the recommended amount of life insurance to provide for the college education of your children.
For Example:
If your youngest child is 4 years old, then 23-4 = 19 years of insurance protection.
Closest term (duration of coverage) for term life insurance is a 20 year term policy.
($139,000 X 2 children) X 5% inflation = $370,000
Closest coverage amount is $400,000
Recommended: 20-year term life insurance policy for $400,000 of coverage.
Covering Funeral Expenses and Burial Costs
Many consumers purchase insurance on their spouse to cover funeral-related expenses. Funerals can cost more than you might expect.
According to Parting.com, as of January 2018, the average cost of a funeral in America is around $10,000.
Some funerals including related "final expenses" can cost as much as $15,000 or more, and this amount is only going to increase over time.
Life Insurance for My Spouse’s Medical Bills
This can be difficult to estimate since it considers costs that may or may not occur in the future.
But, your family should be prepared for possible future medical bills which can be very costly.
In addition to funeral and burial expenses, you should consider hospital bills and medical bills not covered by your current medical insurance plan.
In most cases, before a death, there is a hospital stay and/or hospice care.
Unpaid hospital and hospice bills are two of the main reasons a family is forced to file bankruptcy.
Now that you have considered several areas of financial concern for determining how much insurance to buy on your spouse, we recommend you use a Life Insurance Needs Calculator to assist you in accurately estimating your actual need for life insurance on your spouse, to replace income and properly secure your family’s financial future.
Calculate Your Life Insurance Needs
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