The film is difficult and I remember it being a confusing mess plotwise but a half-decent film.
This from wikipedia should clear it up:
"Despite the film's earlier ambiguities, Spencer and Streck turn out to have been possessed by extraterrestrial beings. In order to keep the secret, Spencer kills Jillian's sister, Nan, who confronts him when she sees Spencer in possession of Reese's satchel. Jillian, suspicious of her husband's actions, sets up a confrontation where she attempts to electrocute herself. The resulting conversation during the confrontation confirms to her that Spencer is possessed. At the end of the confrontation, Spencer is electrocuted and his true alien form (a tentacled energy being) is revealed briefly before "transmitting" itself into Jillian.
Years later, Jillian has re-married and sends her twin sons off on their first day of school. It is implied that she is now possessed and that the children were conceived after Spencer had become possessed. Her new husband is a fighter pilot, a career which Jillian intends for her sons as well."