Getting Married

Getting married is one of the most important events in many people’s lives. Within this section you will find several guides to help you acquire necessary financial intelligence and wisdom.

Financial Guides

What are the financial implications of marriage (and of divorce and re-marriage)? Those who have recently changed their marital status or who are planning such a change may have important financial and legal decisions to make. These decisions might deal with property ownership, providing for children’s welfare, post-mortem planning, and day-to-day finances.

This Financial Guide discusses financial considerations related to a change in marital status. And, because divorce is sometimes the flip side of a marriage–and often the bridge between marriage and remarriage–it is covered here as well.

Note: Under a joint IRS and U.S. Department of the Treasury ruling issued in 2013, same-sex couples, legally married in jurisdictions that recognize their marriages, are treated as married for federal tax purposes, including income and gift and estate taxes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

In addition, the ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country is covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

This guide will also briefly touch on legal issues involved; however, variations in state law make it nearly impossible to discuss in any detail the legal ramifications that a change in marital status presents.

How To Prepare Financially For A First Marriage

For the young, newly married couple, areas of financial concern primarily include: (1) life insurance, (2) form of property ownership, and (3) money management.

Life Insurance

When it comes to insurance needs, the basic rule is that you need enough coverage to sustain your family’s present income level should you die. If you are the only breadwinner, or if you plan on starting a family soon, then you should purchase life insurance.

Property Ownership

If you intend to buy a home or other property or if you and your spouse already own property together, then you need to consider the best way for you to hold that property. Will the property be held solely by one spouse? By both spouses jointly? Because of the complex legal implications of the various forms of property ownership, you should seek legal advice about this issue.

Money Management

It is important to carefully consider how the two of you will handle your day-to-day finances. New couples should be prepared to discuss financial goals, resolve differences (or at least agree to disagree) in spending habits, and establish a budget and/or saving and investment plan.

You’ll also need to think about whether you want a joint bank account, separate accounts, or both. How much do you want to spend on vacations? On monthly food bills? Entertainment? Gifts? Personal items? What are your long-term financial goals?

Do you have a financial plan? If you don’t, then now is the time to prepare one. Even if you do have a financial plan in place, since your marital status has changed it might be time to review and update it.

How To Prepare Financially For A Divorce

If you are considering divorce, it is vital to plan for the dissolution of the financial partnership in your marriage. Such dissolution involves dividing financial assets accumulated during the marriage. Further, if children are involved, future financial support for the custodial parent must be planned for.

While it may not be at the top of your to-do list, taking time to prepare financially during divorce pays off in the long run. Here are some steps you can take to get started.

Take Stock Of Your Situation

Assessing your financial situation helps you in two ways:

  • It will provide you with preliminary information for an eventual division of the property.
  • It will help you to plan how debts incurred during the marriage are to be paid off. Although the best way to deal with joint debt (such as credit card debt) is to pay it off before the divorce, this strategy is often impossible so compiling a list of your debts will help you to come to some agreement as to how they will be paid off.

To take stock of your situation start by preparing an inventory of your financial assets:

    • The current balance in all bank accounts;
    • The value of any brokerage accounts;
    • The value of investments, including any IRAs;
    • Your residence(s);
    • Your autos; and
    • Your valuable antiques, jewelry, luxury items, collections, and furnishings.
  1. Make sure you have copies of the past two or three years’ tax returns. These will come in handy later.
  2. Make sure you know the exact amounts of salary and other income earned by both yourself and your spouse.
  3. Find the papers relating to insurance-life, health, auto, and homeowner’s-and pension or other retirement benefits.
  4. List all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.

Tip: If you are a spouse who has not worked outside the home lately, be sure to open a separate bank account in your own name and apply for a credit card in your own name. These measures will help you to establish credit after the divorce.

Estimate Your Post-Divorce Living Expenses

Figure out how much it will cost you to live after the divorce. This is especially important for the spouse who is planning to remain in the family home with the children; it may be determined that the estimated living expenses are not manageable.

To estimate these expenses, add up all of your monthly debts and living expenses, including rent or mortgage. Then total your after-tax monthly income from all sources. The amount left over is your disposable income.

Cancel All Joint Accounts

It is important to cancel all joint accounts immediately once you know you are going to obtain a divorce because creditors have the right to seek payment from either party on a joint credit card or other credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.

Your divorce agreement may specify which one of you pays the bills. However, as far as the creditor is concerned both you and your spouse remain responsible if joint accounts remain open. The creditor will try to collect the bill from whoever it thinks may be able to pay while at the same time reporting the late payments to credit bureaus under both names. Your credit history could be damaged because of the co-signer’s irresponsibility.

Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If this is the case, then try to get the creditor to have the balance transferred to separate accounts.

If Your Spouse’s Poor Credit Affects You

If your spouse’s poor credit hurts your credit record, you may be able to separate yourself from the spouse’s information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own. If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage, and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouse’s credit record, not yours.

In practice, it is difficult to prove that the credit history under consideration does not reflect your own, and you may have to be persistent.

For Women: Maintain Your Own Credit Before You Need It

If a woman divorces, and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply even though the account remains open.

Maintaining credit in your own name is the best way to avoid this inconvenience. It also makes it easier to preserve your own, separate, credit history. Further, should you need credit in an emergency it will be available when you need it.

Do not use only your husband’s name (for example, Mrs. John Wilson) for credit purposes.

Tip: Check your credit report if you have not done so recently. Make sure the accounts you share are reported in your name as well as your spouse’s name. If not, and you want to use your spouse’s credit history to build your own credit, write to the creditor and request that the account be reported in both names.

Also, carefully review your credit report to determine whether there is any inaccurate or incomplete information. If there is, write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.

If you have been sharing your husband’s accounts, building a credit history in your name should be fairly easy. Call a major credit bureau and request a copy of your report. Contact the issuers of the cards you share with your husband and ask them to report the accounts in your name as well.

If you used the accounts, but never co-signed for them, ask to be added on as jointly liable for some of the major credit cards. Once you have several accounts listed as references on your credit record, apply for a department store card, or even a Visa or MasterCard, in your own name.

If you held accounts jointly and they were opened before 1977 (in which case they may have been reported only in your husband’s name), point them out and tell the creditor to consider them as your credit history also. The creditor cannot require your spouse’s or former spouse’s signature to access his credit file if you are using his information to qualify for credit.

Tip: If you do not have a credit history, a secured credit card is a fairly quick and easy way to get a major credit card. Secured credit cards look and are used like regular Visa or MasterCard’s, but they require a savings or money market deposit of several hundred dollars that the lender holds in case you default. In most cases, the creditor will report your payment record on these accounts just like a regular bankcard, allowing you to build a good credit record if you pay your bills promptly.

Consider the Legal Issues

The best way to plan for the legal issues involved in a divorce including child custody, division of property, and alimony or support payments is to come to an agreement with your spouse. If you can reach an agreement, the time and money you will have to expend in coming up with a legal solution–either one worked out between the two attorneys or one worked out by a court–will be drastically reduced.

Here are some general tips for handling the legal aspects of a divorce:

  • Get your own attorney if there are significant issues to deal with such as child custody, alimony, or significant assets.
  • The best way to find a good matrimonial attorney is to ask for referrals or contact the American Academy of Matrimonial Lawyers (see the last section of this guide for contact information).
  • Make sure the divorce decree or agreement covers all types of insurance coverage including life, health, and auto.
  • Be sure to change the beneficiaries on life insurance policies, IRA accounts, 401(k) plans, other retirement accounts, and pension plans.
  • Don’t forget to update your will.

Tip: Those who have trouble arriving at an equitable agreement–and who do not require the services of an attorney–might consider the use of a divorce mediator. Ask friends, relatives, and other professionals for recommendations or contact the Association for Conflict Resolution (see the last section of this guide for contact information). You can also look in the phone book or classifieds under “Divorce Assistance” or “Lawyer Alternatives.”

Division of Property

The laws governing division of property between ex-spouses vary from state to state. Further, matrimonial judges have a great deal of latitude in applying those laws.

Here is a list of items you should be sure to take care of, regardless of whether you are represented by an attorney.

  1. Understand how your state’s laws on property division work.
  2. If you owned property separately during the marriage, be sure you have the papers to prove that it has been kept separate.
  3. Be ready to document any non-financial contributions to the marriage such as support of a spouse while he or she attended school or non-financial contributions to his or her financial success.
  4. If you need alimony or child support, be ready to document your need for it.
  5. If you have not worked outside the home during the marriage, consider having the divorce decree provide for money for you to be trained or educated.

How To Prepare Financially For Re-Marriage

When considering remarriage, it is important to plan for the following:

  • Whether property acquired before the marriage will be held jointly
  • How to provide for children from a previous marriage
  • Whether a prenuptial agreement is necessary to accomplish goals related to either of these issues

If either spouse has significant assets, it will be necessary to consult an attorney.

As for the estate planning aspects of providing for children from a previous marriage, trusts and/or life insurance are the vehicles most often used to do this.

Tip: Be sure to update your will before you remarry to ensure that your assets will be divided among your heirs after your death in the manner and proportions you desire.

Government and Non-Profit Agencies

    • American Academy of Matrimonial Lawyers (AAML)
      150 North Michigan Ave., Suite 1420
      Chicago, IL 60601
      Tel. 312-263-6477
      www.aaml.org

    • Association for Conflict Resolution (ACR)
      12100 Sunset Hills Rd., Suite #130
      Reston, VA 20190
      Tel. 703.234.4141
      www.acrnet.org
    • National Foundation for Credit Counseling (NFCC)
      Tel. 800-388-CCCS (2227)
      www.nfcc.org
  • Ex-Partners of Servicemen/women for Equality (EX-POSE)
    P.O. Box 11191
    Alexandria, VA 22312
    Tel. 703-255-2917
    www.ex-pose.org
    This non-profit organization provides information to divorcing or separating spouses of military service people.
How much life insurance do you need? What type is appropriate? You should review your life insurance needs each time you have a major life event.

Life Insurance Guide

Frequently Asked Questions

Legal Rights: What are the major differences between married and unmarried couples?

When it comes to legal rights and being married vs. unmarried, there are several major issues to consider. Specifically, unmarried couples do not:

  • Automatically inherit each others’ property. Married couples who do not have a will have their state intestacy laws to back them up; the surviving spouse will inherit at least a fraction of the deceased spouse’s property under the law.
  • Have the right to speak for each other in a medical crisis. If your life partner loses consciousness or capacity, someone will have to make the decision whether to go ahead with a medical procedure. That person should be you. But unless you have taken care of some legal paperwork, you may not have the right to do so.
  • Have the right to manage each others’ finances in a crisis. A husband and wife who have jointly owned assets will generally be affected less by this problem than an unmarried couple.

What estate and financial planning steps are particularly important for unmarried couples?

The following steps are particularly important for couples who are not married:

  • Prepare a will. If both partners make out wills, the chances are that the intentions expressed in the wills will be followed after one partner dies. If there are no wills, the unmarried surviving partner will probably be left high and dry.
  • Consider owning property jointly. Joint ownership of property with right of survivorship is a way of ensuring that property will pass to the other joint owner on one joint owner’s death. Real property and personal property can be put into this form of ownership.
  • Prepare a durable power of attorney. Should you become incapacitated, the durable power of attorney will allow your partner to sign papers and checks for you and take care of other financial matters on his or her behalf.
  • Prepare a health care proxy. The health care proxy (sometimes called a “medical power of attorney”) allows your partner to speak on your behalf when it comes to making decisions about medical care, should you become incapacitated.
  • Prepare a living will. A living will is the best way to let the medical community know what your wishes are regarding artificial feeding and other life-prolonging measures.

Do married couples need life insurance?

The purpose of life insurance is to provide a source of income for your children, dependents, or whoever you choose as a beneficiary, in case of your death. Therefore, married couples typically need more life insurance than their single counterparts. If you have a spouse, child, parent, or some other individual who depends on your income, then you probably need life insurance. Here are some typical families that need life insurance:

  • Families or single parents with young children or other dependents. The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts. If the family cannot afford to insure both wage earners, the primary wage earner should be insured first, and the secondary wage earner should be insured later on. A less expensive term policy might be used to fill an insurance gap. If one spouse does not work outside the home, insurance should be purchased to cover the absence of the services being provided by that spouse (child care, housekeeping, and bookkeeping). However, if funds are limited, insurance on the non-wage earner should be secondary to insurance on the life of the wage earner.
  • Adults with no children or other dependents. If your spouse could live comfortably without your income, then you will need less insurance than the people in situation (1). However, you will still need some life insurance. At a minimum, you will want to provide for burial expenses, for paying off whatever debts you have incurred, and for providing an orderly transition for the surviving spouse. If your spouse would undergo financial hardship without your income, or if you do not have adequate savings, you may need to purchase more insurance. The amount will depend on your salary level and that of your spouse, on the amount of savings you have, and on the amount of debt you both have.
  • Single adults with no dependents. You will need only enough insurance to cover burial expenses and debts, unless you want to use insurance for estate planning purposes.
  • Children. Children generally need only enough life insurance to pay burial expenses and medical debts. In some cases, a life insurance policy might be used as a long-term savings vehicle.

If one spouse changes their name after marriage, who should be notified?

You should notify all organizations with which you previously corresponded with your maiden name. The following is good list to start with:

  • The Social Security Administration
  • Driver’s license bureau
  • Auto license bureau
  • Passport office
  • Employer
  • Voter’s registration office
  • School alumni offices
  • Investment and bank accounts
  • Insurance agents
  • Retirement accounts
  • Credit cards and loans
  • Subscriptions
  • Club memberships
  • Post Office

Do I need to update my will when I get married?

Absolutely. Your will should be updated often, especially when such a significant life event occurs. Otherwise you spouse and other intended beneficiaries may not get what you intended upon your death.

What are the tax implications of marriage?

Once you are married you are entitled to file a joint income tax return. While this simplifies the filing process, you may find your tax bill either higher or lower than if each of you had remained single. Where it’s higher it’s because when you file jointly more of your income is taxed in the higher tax brackets. This is frequently referred to as the “marriage tax penalty.” Tax law changes in the form of marriage penalty relief were made permanent by the American Taxpayer Relief Act of 2012, but don’t eliminate the penalty for taxpayers in the higher brackets.

You cannot avoid the marriage penalty by filing separate returns after you’re married. In fact filing as “married filing separately” can actually increase your taxes. Consult your tax advisor if you have questions about the best filing status for your situation.

Note: Under a joint IRS and U.S. Department of the Treasury ruling issued in 2013, same-sex couples, legally married in jurisdictions that recognize their marriages, are treated as married for federal tax purposes, including income and gift and estate taxes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

In addition, the ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country is covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

How can married couples hold property?

There are several ways of owning property after marriage, but keep in mind that they may vary from state to state. Here are the most common:

  • Sole Tenancy. Ownership by one individual. At death the property passes according to your will.
  • Joint Tenancy, with right of survivorship. Equal ownership by two or more people. At death property passes to the joint owner’s. This is an effective way of avoiding probate.
  • Tenancy in Common. Joint ownership of property without the right of survivorship. At death your share of the property passes according to your will.
  • Tenancy by the Entirety. Similar to Joint Tenancy, with right of survivorship. This is only available for spouses and prevents one spouse from disposing of the property without the others permission.
  • Community Property. In some states, referred to as community property states, married people own property, assets, and income jointly; that is, there is equal ownership of property acquired during a marriage. Community property states are AZ, CA, ID, LA, NV, NM, TX, WA, and WI.

How do insurance companies classify individuals for rate purposes?

Premiums vary among insurance companies so it’s a good idea to comparison shop in order to get the best premium. It’s also helpful to understand how premiums are calculated by insurers. Here’s a quick look at how this works.

Insurance companies place individuals into four risk groups: preferred, standard, substandard, or uninsurable. A terminal illness at the time you apply for insurance will render you uninsurable. Having some type of chronic illness will place you in the substandard category. People with conditions such as diabetes or heart disease can be insured, but will pay higher premiums.

If you have a high-risk job or hobby, you will be considered substandard, a high risk.

The premiums charged will be commensurate with the category you are placed in. Thus, a standard risk will pay an average premium for similarly situated insurers.

Tip: One company’s category for you may not be the same as another company’s category, so it still pays to shop for insurance with other companies even though one may have labeled you “substandard.”

Tip: Once an insurance company approves you for coverage, you cannot be dropped unless you stop paying your premium.

What questions should I ask my life insurance agent?

Here are some questions to ask about policies:

  • How do cash values accumulate? An early, rapid build-up is generally preferable.
  • How has the policy’s cash value performed in the past? You can get this information from a publication called Best’s Review, Life-Health Insurance Edition. Determine how the policy performed in comparison with the company’s projection and with other insurers.
  • Are any special features merely bells and whistles, or do they add value for you?
  • What is the company’s rating with A.M. Best, Standard & Poor’s, and Moody’s? You can find these publications in public libraries or online. The rankings should be in the top three to ensure that a company has financial stability.

What should I watch out for when buying life insurance?

Policy provisions that are hard to understand and compare. Many insurance company products contain investment features as well as insurance elements. Because these insurance products are very complex and have many variations, most clients cannot understand them. As a result, rates cannot easily be compared.

Pushing inappropriate policies. Make sure your agent carefully identifies your needs and explains why the policy is suitable for you. You may want to have your accountant or financial planner review any recommended policies before you make any purchases.

High commissions. Make sure you review the costs of any recommended policy carefully. As much as 80 percent of your first-year premium might go into the pocket of the insurance agent.

Tip: Due to administrative costs and commissions paid to agents the expected rate of return on insurance policies is generally low. If you want both insurance and investment returns, unbundle your needs. Get your life insurance from the insurance company (at the lower premium for pure, term insurance) and put the premium savings (the investment element) into a more profitable investment vehicle, where your return at age 65 will be substantially higher than through the insurance company’s annuity.

Safety of investment. Check an insurer’s rating before purchasing a policy. Even venerable companies such as Lloyd’s of London can be wiped out by unexpectedly high claims and the insured’s investment (as well as life insurance proceeds) can be lost.

How do I compare the cost of several insurance policies?

In most states, there are rules, set by a group of state insurance regulators, requiring the agent to calculate two types of cost indexes that can help you to shop for a policy. You can use these indexes to compare policy costs.

One type of index, the net payment index, gauges the cost of carrying your policy for the next ten or twenty years. The lower the number is, the less expensive the policy will be. This index is useful if you are most interested in the death benefit aspect of a policy, as opposed to the investment aspect.

The other type of index, surrender cost index, is useful to those who have a high level of concern about the cash value. This index may be a negative number. The lower the number is the less expensive the policy will be.

These two indexes apply to term and whole life policies; however, with universal life policies, you’ll need to focus on the cash value growth and the cash surrender value to make comparisons. “Cash surrender value” is the amount you receive if you cancel the policy. It is not the same as “cash accumulation value.

If you are shown two universal life policies, and they have the same premium, death benefit, and interest rate, then in most cases, the one with the higher cash surrender value is generally the better policy.

Do I really need life insurance?

The purpose of life insurance is to provide a source of income for your children, dependents, or whoever you choose as a beneficiary, in case, of your death. Life insurance can also serve other estate planning purposes, such as giving money to charity on your death, paying for estate taxes, or providing for a buy-out of a business interest.

Whether you need to buy life insurance depends on whether anyone is depending on your income. If you have a spouse, child, parent, or some other individual who depends on your income, then you probably need life insurance. Here are some typical families and a summary of their need for life insurance:

  1. Families or single parents with young children or other dependents. The younger your children, the more insurance you need. If both spouses earn income, then both spouses should be insured, with insurance amounts proportionate to salary amounts.
  2. Adults with no children or other dependents. If your spouse could live comfortably without your income, then you will need less insurance than the people in Situation (1). However, you will still need some life insurance. At a minimum, you will want to provide for burial expenses, for paying off whatever debts you have incurred, and for providing an orderly transition for the surviving spouse.
  3. Adults with no children or other dependents. If your spouse could live comfortably without your income, then you will need less insurance than the people in Situation (1). However, you will still need some life insurance. At a minimum, you will want to provide for burial expenses, for paying off whatever debts you have incurred, and for providing an orderly transition for the surviving spouse.
  4. Single adults with no dependents. You will need only enough insurance to cover burial expenses and debts unless you want to use insurance for estate planning purposes.
  5. Children. Children generally need only enough life insurance to pay burial expenses and medical debts. Many advisors recommend self-insuring for children rather than buying an insurance policy.
  6. Retirees. There is less of a need for life insurance after retirement unless it is to be used for estate planning purposes. You may need to provide an income for the second spouse to die if your retirement assets are not large enough. Further, you will need some insurance to pay burial expenses, final medical costs, and debts.

How much life insurance should I buy?

Determining how much insurance to buy requires you to calculate your current annual household expenses, followed by your assets, debts, and other sources of income. Your financial advisor can assist you in this computation.

The ideal amount of coverage is the amount that would allow your dependents to invest it after your death and maintain their desired standard of living without touching the principal. Although the old rule of thumb–to buy five, six or seven times your annual salary–may serve as a starting point, it is no substitute for making the calculations to find out how much you really need.

It’s important to be as accurate as possible in estimating your family’s needs since an underestimation could lead to your being underinsured, and an overestimation will lead to money wasted on unnecessary coverage.

Tip: To accurately estimate your family’s annual income needs, it’s helpful to have the following documents with you: A checkbook register for one year, a year’s worth of credit card statements, and last year’s tax return.

What type of life insurance should I buy?

Once you have an idea of how much coverage you need, you can decide which type of insurance product would be best to fill those needs. Although the array of insurance products may seem confusing, there are really just two types of insurance.

  • Term, whereby you pay for coverage for a specified amount of time, and if you die during that time the insurer pays your survivors the death benefit specified; and
  • Cash value, usually referred to as whole life, universal life, or permanent life insurance, where, in addition to paying a death benefit, it also provides you with some other redeemable value.

For individuals age 40 or less, a term policy will almost always be less costly than a whole life policy. Although term policies do not build cash values, many are convertible to whole life policies without a physical exam. Thus, a term convertible policy may be a good option for someone who is under 40. There are various types of term insurance, which we will discuss briefly here.

  • Renewable. A renewable term policy is the most common type of life insurance where the policy renews automatically on a renewable term, e.g. every year, every 5 years, every 10 years, or every 20 years–the most popular renewal term. You do not need to take a physical or verify the fact that you are employed. The premium goes up at the beginning of each new term to reflect the fact that you are older. Most renewable term policies can be renewable until you reach age 70 or so.
  • Re-entry. With this type of policy, you must undergo a physical exam after a certain period, or pay an extra premium.
  • Level. With level term policies, the premium is guaranteed to stay the same over a certain period. This period may be shorter than the term of the policy. Nearly all life insurance bought today is level term insurance.
  • Decreasing. With a decreasing term policy, a good option for insuring mortgage payments the face amount of the policy decreases over time while the premium payments remain the same.
  • Return of Premium. Some insurers offer term life with “return of premium.” Typically, premiums are significantly higher and they require keeping the policy in force to its term.

There are four types of cash value life insurance: (1) whole life, (2) universal life, (3) variable universal life and (4) variable whole life. The first two types are the most common and have a guaranteed cash surrender value; in the last two types, the cash surrender value is not guaranteed.

Whole Life. This is the traditional life insurance policy. It provides a death benefit, has a cash value build-up, and sometimes pays dividends. You do not need to renew a whole life policy. As long as you pay your premiums, you will have coverage, usually until your death. The premium for a whole life policy remains the same for the amount of time you own the policy; the premium is “level” in insurance parlance. Thus, when you are younger, the premium you pay for whole life will be greater than what you would pay for term insurance but when you are older, the premium will be much less than a term premium. Part of each premium goes into the cash value of your policy. Your cash value, which is actually an investment, is guaranteed to grow at a fixed rate. You do not have to pay current income taxes on the growth in the cash value-it is tax-deferred.

Tip: You can borrow against your cash value at a rate that is usually better than the prevailing consumer lending rates. If you die with an outstanding loan amount, the loan amount, plus interest, will be subtracted from your death benefit.

Dividend-paying whole life policies-termed “participating” policies are usually offered by mutual life insurance companies. Mutual life insurance companies are generally owned by policyholders while other insurance companies are owned by shareholders. The dividends are refunds of insurance premiums that exceed a certain level. They are paid when the insurance company does well during a quarter or a year. Of course, premiums for participating policies are usually higher than those paid for non-participating policies.

Note: Term policies can also be participating, but the dividends paid are usually minimal.

Universal Life. Universal life, also known as “flexible premium adjustable life,” is similar to whole life, but offers more flexibility in terms of payment of premiums and cash value growth. With a universal life policy, your monthly premium amount is first credited to your cash value. The company then deducts the cost of your death benefit and the expenses of the policy. These costs are about equal to what it would cost to buy term coverage. As with whole life, your cash value grows at a fixed minimum rate of interest. The growth of the cash value is tax-deferred, and you can borrow against it or make partial withdrawals.

Caution: A special feature of universal life is that you can vary the premium paid from month to month. You can pay more or less-within certain limits-without jeopardizing your coverage. You can even let the cash value absorb the premium. However, the danger here is that if the premium payments fall too low, your policy may lapse. While some states require the insurer to tell you when your cash value is at a dangerously low point, you will, if you live in another state, have to maintain a careful watch on the amount of cash value if premiums are skipped.

Variable Universal Life. Variable universal life allows you to choose the investment for your cash value. You have a potentially greater cash value growth, but you also have added risk, depending on the type of investment you choose.

Variable Whole Life. With variable whole life, the death benefit and cash value will depend on the performance of an investment fund that you choose. Again, you have potentially greater reward, with its accompanying risks.

Should kids have life insurance?

Since the purpose of life insurance is to provide for dependent survivors, children generally need only enough life insurance to pay burial expenses and medical debts. Yet, 25 percent of cash-value life insurance policies sold covers the life of a child under 18. Note: Cash value life insurance; either whole life or universal life combines a death benefit with a savings or investment element.

Alternatives to covering the costs of a child’s death include (1) using funds already set aside for college and (2) taking out a rider on a parent’s policy (if available).

How do I balance life insurance with my other investments?

Get term life insurance if you haven’t bought a policy yet. Then invest as much as you can in tax-deferred IRAs and 401(k) plans. If your money is in stock funds, you are more likely to experience bigger gains than you are with a cash-value policy.

If you already have a cash-value policy, don’t sell it. Just realize that it is a conservative, long-term investment. The cash value eventually may be substantial because it is a tax-deferred investment. It may take 15 years or more, however, to produce a respectable return, similar to high-quality corporate bonds or long-term CDs. Balance your policy with investments such as stock funds, with a higher, long-term return.

Financial Calculators