Should your Non Working Spouse Purchase Whole Life Insurance?

Written by Scott W Johnson

Should your Non Working Spouse Purchase Whole Life Insurance?  When to Consider a permanent Contract for a Stay at Home Mom/Dad.

Whole life insurance is a form of permanent life insurance that builds up cash value.   The cash value slowly builds over time.   In a typical whole life policy there is little if any cash accumulation for the first five years.  Depending on the policy and insuring company the real value of a whole life policy starts to appear somewhere between years 14 to 20.   As opposed to term life insurance, whole life though, is much more expensive.  This is often 8 to 12 times more the cost.

The value of whole life insurance for the typical american is usually only if they are able to pay each and every year.  Although these policies allow for loans and withdrawals, the math of the cash accumulation does not really pay out when the withdrawals and loans are used.   Since the optimal benefit of whole life is really only seen when it is paid for each and every year for 20 or so years in a row, it can be a difficult suggestion, in my opinion, to suggest such insurance policies to most people.   Let alone non working partners.

When should a Non Working Spouse Purchasing a Whole Life Insurance?

One reason why a non working spouse may want to consider a whole life policy is because they may have limited access to retirement accounts, such as 401Ks and Roth 401Ks.  However, typically a non working spouse is still able to contribute to an IRA account when they are married to a working spouse.   Since the stay at home spouse is obviously not bringing in money it might be difficult to suggest to a stay at home dad or mom, to pledge to plunk down $8,000 per year for an expensive permanent life insurance contract each and every year.   Obviously you would be completely dependent on the income of the working spouse.

It may make more sense for the non working spouse to consider it if they are healthier, younger, or have other less extreme underwriting criteria. In other words the the working mom is a hang glider, but the stay at home dad is not.  Of note whenever couples purchase any form of life insurance and one person is working and the other is not, is that life insurance companies do not often prefer to write more life insurance face value on the non working partner.  Therefore you may need to write a tandem term policy on the working mom in this situation.

It is also possible that the stay at home dad may not be able to qualify for a term life insurance policy and hence needs to purchase a form of whole life called guaranteed issue.  This is not optimal, but it may be the best that you can do.

Non Working Spouse Purchase Whole Life Insurance

The Optimal Reasons to Consider Whole Life for your Non Working Spouse:

There are really two optimal scenarios that I see for a Non Working Spouse Purchase Whole Life Insurance.  There probably could be others, that I would be open to discussing with potential clients, but the following two, have solid financial, ethical, and value based reasons.

For use with a Special Needs Trust.   A special needs trust could be set up for someone that may need constant care for the rest of their lives.  This trust, almost always set up with a lawyer would allow for money to be set aside.  The Life Insurance component could be used a a relatively guaranteed means of funding this trust.   When I say “relatively guaranteed” – I mean about as guaranteed as you are able find in the financial world.   You would want to discuss this with both your attorney and your financial adviser before proceeding.   The “owner” of the trust and the “beneficiary” of it are of paramount importance in the life contract’s creation.

For the Ultra High Net Worth Couple that is using Permanent Life Insurance possibly in conjunction with Life Insurance Trusts for both Asset protection and for Inheritance/ Tax Reasons.   This would be done with a bevy of accountants, financial professionals, and attorneys.   When I say Ultra High Net Worth, I’m referring to  people that are easily worth more than say Ten Million US Dollars.  People that probably make in excess of $700,000 to $800,000 per year.  Clients that are concerned with passing down more money to their heirs than is allowed without substantial inheritance taxes becoming involved.

What About for Everyone Else?

For the vast majority of folks the non working spouse should consider hard, the use of a term life insurance policy.  Typically for a length that allows their youngest child to reach maturity and/or college.   For some, that is a is a twenty year level term life policy.  For others it may be a fifteen year.  Term life is simple, efficient, and easy to compare.  Unlike whole life insurance, One policy can easily be valued against another.  In as little as fifteen minutes a stay at home mom can evaluated quotes from six different companies.  Can you do that with whole life?

If the situation arises when you cannot somehow pay your term life insurance policy, than the policy will expire and you will no longer be insured.  However, this will not put your investments at risk.   Imagine if your 401K had this issue?  Does your 401K expire if you miss an investment year?  Keep in mind that a whole life policy though, may be 8 to 12 times more expensive.  If you cannot afford a term life policy for a given year, how would you have ever been able to afford a whole life contract?

So, Should your Non Working Spouse Purchase Whole Life Insurance?   Should a Stay at home Dad consider Whole Life Insurance? Should they purchase this policy say from their local property and causality insurance agent that sold them their home insurance?   In general, I do not believe so, I don’t believe that it is warranted for them.  Instead of purchasing a $100,000 whole life policy for them, consider a $200,000 20 year term policy for the non working spouse and a companion (completely separate) insurance contract for the working spouse of the same amounts and durations.   With the excess money not spent, you can up your contributions to your 401K, Roth IRA, pay down your mortgage, and set up an emergency fund.

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