Life Insurance Strategies for Dual-Income Couples With Young Kids

Key Takeaways

Your life insurance can be joint or separate, term or permanent
Consider debts, childcare, and unpaid at-home labor when choosing coverage
Joint life insurance can be much cheaper
Separate insurance is more customizable

Life Insurance Strategies for Dual-Income Couples With Young Kids

Introduction

It’s expensive to raise children. Even if you and your spouse both make money, a loss can mean financial devastation. You may think only one of you needs life insurance, but is that really enough? The right joint policy could ensure true protection for your children. Estate planning goes a lifelong way.

In this guide, we will analyze the best estate planning strategies for dual-income couples, how to protect your children, and what life insurance policies to consider.

Why Dual-Income Families Need Special Planning

A major misconception is that because both of you make money, you would still make money even if one of you passes away. But what about expenses and emergencies? What about childcare costs, tuition, and the lost income?

Life and financial obligations do not disappear in the tragic event of a death. The surviving part of the family would still need to pay to maintain their lifestyle and meet crucial financial obligations. If they cannot pay for the mortgage, rent, or education, it can be devastating in the long run.

Because of the way dual-income streams prop up the family together, these families face unique needs and challenges when compared to single-income households. It is highly recommended to get life insurance for dual-income families, which comes in the form of various special types of insurance.

Coverage Alignment Between Spouses

Dual-income families should generally have life insurance coverage for both parents. This can be a complicated topic if there is a significant income disparity between the spouses, but it’s important to talk about it.

How to balance policy amounts

Both parents should have coverage, not just the higher earner. Essentially, you want to avoid any overlap or underinsurance by balancing your policy amounts. Think about questions such as:

Income replacement requirements for each parent. How much income is lost if one parent becomes incapacitated or passes away?
What unpaid labor contributions need to be matched? Childcare, household work, and other labor should be counted

How much total insurance coverage do you need as a dual-income family

This depends on so many factors, but you probably need more life insurance coverage than you think.

Think about what would happen if you lost both or one of your income sources abruptly. What expenses would be urgent? Could you still afford essentials like food, rent/mortgage, and pressing debts? Childcare? Tuition?

With inflation, future expenses, and numerous financial concerns, many families with children can benefit from a $500,000 or greater life insurance policy. Just be careful so as to not commit to an expensive life insurance policy that you cannot afford.

Life insurance coverage should be enough to meet your family financial needs in case of a catastrophe. Buy enough to ensure your surviving family’s safety in case you, your spouse, or both of you pass away.

Joint vs. Separate Policies

Joint Life Insurance (First-to-Die vs Second-to-Die Policies)

Joint life insurance takes into account both policyholders, making it useful for couples with the same dependents. It is also useful for linking two people so that they can more easily obtain life insurance proceeds, going in both directions.

First-to-die policy: Covers both people. Pays a death benefit to the survivor when the first one passes away. Useful for ensuring the surviving spouse can pay off debts, funeral expenses, mortgage, and other essentials.

Second-to-die: Covers both people. Pays a death benefit to the beneficiary when both people pass away. Useful for protecting a dependent (e.g. child).

Joint policies tend to be more affordable than standard life insurance. This makes permanent life insurance policies easier to purchase even for the budget-conscious. The two types have key differences, but let’s go over their general pros and cons first.

Pros:

Lower premiums
Easier management
Makes permanent life more accessible
Allows you to choose what scenarios you want protection against

Cons:

Payout structure may not be useful for you
You may lose out on separate life insurance features and riders

Separate Policies

On the other hand, you could get separate life insurance policies for each of you. The individual coverage for each spouse allows more flexibility, especially if one side prefers to have more customized riders or terms.

Pros:

Easier to get customized coverage
More life insurance options
Dual payouts may be possible
Better insurance flexibility

Cons:

Higher costs compared to a single joint policy
More complicated to manage
You lose out on potentially beneficial payout structures

Estate Planning Considerations

Estate planning is crucial if you have young kids. First off, you need to determine in your will who would take care of your minor children if you become incapacitated or pass away. Plan your estate so that your beneficiaries are properly protected. Name your spouse and children as designated beneficiaries.

Should you use a trust?

Trusts are legal entities that you can use similar to wills to pass on an inheritance. Trusts can be revocable or irrevocable.

Irrevocable life insurance trusts (ILITs) can be used to protect assets and beneficiaries.

You may want to establish a trust for your minor children and structure it so that they receive the value of the inheritance as they grow up. This can help you protect them from having to experience inheritance complications. It is also crucial if your child has any special needs. A Special Needs Trust ensures your child would still qualify for important government benefits while still inheriting the assets.

Naming contingent beneficiaries

Remember to name contingent beneficiaries. These are activated in case the primary beneficiaries are unable to accept the inheritance.

Align all estate plan documents

Make sure you have taken into account all the different trusts, wills, guardianship plans, and 529 education funds.

If you list a beneficiary (e.g. your child) in your life insurance plan, but say you’re giving the proceeds to both your child and your spouse in your will, the life insurance designation overrides the will.

Key Policy Features to Consider

Term vs permanent

This is perhaps the most important choice you can make regarding your family’s life insurance plan.

Term life insurance policies: Lasts a specified duration, such as 5, 10, or 15 years. After the term is over, you can try to extend it. You are usually expected to take a medical exam that determines your policy premium and coverage, though no-exam policies exist.

Permanent life insurance policies: Lifelong coverage that lasts as long as you are keeping the policy in force by paying the premiums continuously. Offers other benefits, from cash value accumulation to the ability to withdraw money early.

You can choose your policy depending on your budget and long-term goals.

If you opt for a permanent life policy, you can choose between a variety of beneficial features. Universal life insurance can accrue cash value over time and be adjustable, while whole life is expensive but provides valuable investment growth.

Life insurance riders

An insurance rider can be used to modify the coverage of your base life insurance policy. Typically, individual policies will have more rider options available to you. Common riders you should know about as dual-income couples include:

Child coverage rider
Waiver of premium
Accidental death benefit
Chronic illness

Convertability

Some term life insurance companies let you convert the term life policy to a permanent one. Should you convert? It depends on if your financial situation has changed to benefit more from a permanent life insurance policy. Remember, you have to be of a healthy state and under a certain age to qualify for permanent life insurance. The later you choose permanent life, the more expensive it is; you may even fail to qualify.

Scenarios & Examples

Not sure whether you need joint, separate, or a special type of life insurance? Let’s go over a few real-life scenarios in which life insurance for dual-income families would have made a difference.

Scenario 1

Two parents both have income sources, but one is the breadwinner and the other spends a lot of time taking care of their children. This counts as unpaid childcare, but they do not take this into account when buying life insurance. They only purchase life insurance for the major income earner.

Tragedy strikes when the one who spends more time at home passes away. There is no life insurance to help cover emergency expenses. Childcare expenses suddenly become necessary, for extra caretakers, education, and essentials. The surviving parent ends up struggling to pay the mortgage and everything else at the same time, drastically reducing the comfort of both the child and the parent.

In this case, any sort of joint life insurance or two policies would have provided the surviving family with much more financial security. Often, the major income earner should not be the only one to have life insurance.

Scenario 2

Two spouses are planning for a smoother estate transfer for their young child. They are currently struggling with finances and do not expect to comfortably pay for two single life insurance policies. They decide on a cheaper joint second-to-die permanent policy for legacy planning.

In the end, both spouses survive for decades to come. The life insurance doesn’t pay out until a long time later, but the premiums are also affordable enough that they pose no issue throughout the years.

Scenario 3

Let’s say both parents earn similar salaries but are separated. They purchase equal, but separate, term policies. It makes more sense for them to not be on the same policy and have full control over their own life insurance. Their child gets full protection in case something happens to one or both of them.

Practical Steps to Get Started

Assess total family financial needs

Every family is unique. Assess your situation to see what kind of life insurance would actually benefit you.

Things to consider include:

Debts and financial obligations
Future expenses (e.g. college tuition)
Childcare expenses that may change (if either of you does unpaid childcare)
Current savings and assets

Decide policy type and length

Term vs permanent, joint vs separate, standard vs hybrid. There are many choices to make regarding life insurance. Even within the same type of insurance, factors such as policy details and life insurance company will impact your coverage immensely.

If you’re uncertain, term life is typically recommended. Permanent life insurance comes with tons of potential benefits, such as cash value accumulation over time and tax advantages, but it shouldn’t be haphazardly purchased. Permanent life insurance policies are hard or expensive to cancel.

Get quotes for joint and separate policies

The more life insurance quotes you get, the better idea you have of what premiums you can expect to pay.

Review and adjust coverage as children grow

Children have different childcare needs depending on their age and the presence of any unique situations. Depending on their education, health, and dreams, you may need to plan your estates differently.