So what happens when July comes around?

Would like to know if I buy my wife an iPhone and when Apple releases iPhone 5 in July is there an "upgrade" option or am I screwed till her 1/2 years is up?

Yes, but like you said, Verizon would not upgrade the phones to customers. Then why Apple feel forced to upgrade the phone when the purchasers are already locked into a 2 year contract? Especially when LTE will not be that widely deployed even by summer time? They may come out with a new version for AT&T but, I highly doubt they will come out with a new version for Verizon so soon. You can argue that the V iPhone is a 7 month old device but, for VERIZON and it's customers, it is a NEW phone. 
It makes more sense for Apple to keep both devices on a seperate refresh cycle until they come out with a true dual band version. 
PS- I was being facetious about Verizon uograding everyone to the iPhone 5. We all know how that would play out . 

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