Joint life insurance
When people buy life insurance, they mostly purchase an individual policy, which only pays if the insured individual dies. A couple – whether married or not – has another option: buying joint life insurance.
Though joint policies are not as popular as individual policies, it can be the best option for certain people. This article can help you decide which is best for you by explaining three things:
- The two main types of joint coverage
- The advantages and disadvantages of getting a joint policy
- How joint life insurance policy is different from individual coverage.
What are the two main types of joint life coverage?
Joint life insurance covers two individuals who will likely die at different times. The policy however pays only a single life insurance benefit. The next question is, “When is that benefit paid – after the first death, or after the second death?” That’s why insurance companies offer two kinds of joint life coverage.
First-to-die life insurance
This type of policy is paid after the first person dies. This is mostly purchased as income replacement for a young family, with the surviving spouse named as the beneficiary. For instance, in a household where both partners earn similar income, a first-to-die policy can help the surviving spouse support a family while maintaining their current lifestyle.
However, once the benefit is paid out, there will be no remaining coverage for the second partner. If they want to continue having life insurance protection, he or she will have to apply for new coverage.
Second-to-die life insurance
This type is sometimes called survivor-ship life insurance. The benefit here is paid out after the second spouse passes away. It doesn’t provide income replacement for the surviving spouse, instead, the payout goes to the couple’s beneficiaries. This type of policy is mostly purchased for estate planning and can be an option to help address concerns with the time and uncertainties of probate (the legal process for validating a will) while also providing:
- Funding for special needs of children
- Liquidity to pay estate and inheritance taxes
- Estate equalization among heirs
- Assets to generate income for other surviving dependents
It’s necessary to note that the beneficiaries of a second-to-die policy do not have to be the couple’s children or relatives. The beneficiary doesn’t even have to be a person. This type of policy can be used to simplify the transfer of assets to a non-relative like a friend or business associate, a favorite charity or religious organization, or as funding for a family trust.
While it sometimes makes sense for two younger people to get first-to-die coverage in a term life policy, second-to-die coverage for estate planning is typically purchased with a permanent (whole or universal life) policy. The reason is that if the policy term ends before the second covered person dies, no assets will be passed to beneficiaries.
The advantages and disadvantages of getting a joint life insurance policy
This type of coverage is rare because there are more unknowns compared to individual life insurance. This implies that you should have a specific reason for purchasing it. Before you buy joint coverage, consider exploring other permanent and term life insurance options. Below are the main reasons why you would – or wouldn’t – want to get a joint life insurance policy:
Advantages of joint life insurance
It provides affordable protection for young, two-income families:
Most young families buy only individual life insurance for the primary earner. This is because if that person dies, they need to replace the income they would have otherwise provided. However, when both spouses earn the same amount, the household is equally dependent on both sources of income. If either were to pass away, the other would need the same amount to maintain the family’s standard of living. Thus, a single first-to-die insurance policy may be more affordable than two individual policies for the same amount.
It gives the surviving spouse more control over estate planning:
Most times, couples use life insurance to leave a legacy to loved ones. A second-to-die life policy allows them to delay the transfer of assets until both people have passed away. This allows the surviving person to tap into the policy’s cash value if needed. The person can also alter beneficiary designations if circumstances change.
Disadvantages of joint life insurance
The surviving partner may have to buy additional coverage at a higher price
If a first-to-die policyholder passes away, the other gets paid – but no longer has life insurance protection. At that point, the surviving person will be some years older and possibly in worse health. Thus when he or she gets life insurance quotes for new coverage, the premiums may be significantly higher.
If one of the spouse has health issues, it could be more expensive than individual coverage
Joint life insurance policy costs are calculated based on the average health status of both spouses If one person is significantly less healthy than the other, premium costs will be higher. Similarly, where there is a wide age disparity the policy cost will be higher. If one person is a smoker, policy cost will go up. On the other hand, the less healthy partner may be able to secure coverage when they otherwise might not.
You may have to wait a very long time for a payout
A second-to-die policy will only pay after the longest surviving spouse passes away. This may not be an issue if you are buying a permanent policy for long-term estate-planning purposes. But it means that if you get a term policy, one of you might outlive the term length. In this case no one gets paid.
Joint policies aren’t easily divided when people split up
While divorce (unlike death) is not a certainty, it does happen. Some joint life insurance policies may not allow the coverage to be split into two individual policies. If your insurance company doesn’t have an optional provision that allows policy splitting, and you don’t want to continue to have a policy that ties you to your ex, you may have to let the coverage go. You can try to get an individual policy at that point. But of course as an older applicant, your coverage may be more expensive.
How are joint life insurance policies different from individual coverage?
An individual life insurance policy covers a single person, but joint life insurance covers two people – and only two. However, it only pays a death benefit when one of those people die. This means the chosen amount of cover is paid out if the first person dies, during the length of the policy, after which the policy would end. This is a key point about joint life insurance: the policy pays out only once, leaving the surviving partner without cover under that policy.
Joint coverage can also be cheaper than individual life insurance policy. Generally speaking, it costs more to buy two individual $1,000,000 policies than to get joint coverage for $1,000,000, for obvious reasons: With two individual policies, insurance companies have a potential payout of $2,000,000, but with a single life insurance policy for two individuals, the total payout is only half as large. Bottom of Form
Why should you consider a joint life policy?
Joint life insurance can be a fit for certain kinds of people. For instance a young, dual-income couple or older, affluent couples with complex estate planning needs. But then, it also has a number of limitations. Thus so it may not be an option to consider for most life insurance customers.
If both members of a couple need the same level of coverage, it may be less expensive to buy a single joint policy with a given face value (benefit amount) compared to two individual policies with the same face amount
Which would be the best life insurance for couples?
Most people think it makes sense for the breadwinner of the family to purchase a single life insurance policy in their name to protect their family from financial hardship if they died. This ignores the fact that the loss of someone who takes care of the family can have financial impact on a family.
Nowadays, there are often two breadwinners in the family. Thus if you decide to take out life insurance it’s more likely that both partners will need cover. You have two options available – two single life policies or a joint life policy. In deciding which of them will best suit your needs, consider the following:
Consider your needs
If you have family members who depend on you financially you may have a need for life insurance. When deciding which of these options is right for you, consider your present needs. Even though it’s not nice to think about, you should prepare for worst-case scenarios.
Even though you are in a relationship, it doesn’t mean that you have the same protection. Whether joint or single life policies are suitable will depend on what each of you wants to protect. It also depends on how long each of you want the cover to last. Considering individual circumstances, a joint life, single life or a combination of both policies the right choice for you.
Joint life policies could be a good choice if you both need the same level of cover for the same length of time. For instance, to cover a joint mortgage where the cash sum only needs to be paid once. Both policy holders would receive the same level of cover under a joint life policy. But if you have different protection needs, one partner may be left with too much or too little protection.
You can consider single life policies if there are differences in the level of cover that you both need, how long you need cover or whether you want the cash sum paid twice if you both pass away during the length of the policy.
Joint life insurance could be cheaper than two single policies designed to provide the same amount of cover over the same period. However, a joint life policy only pays out once, leaving the surviving partner without cover under that policy. But a single life insurance policy can offer more protection because each partner has individual cover.
Your needs could change in the future. It will be a good idea to review your cover from time to time. This is to ensure that you have the correct level of protection in place. Where divorce occurs, it may not be possible for insurer to divide a joint life policy into two single policies.
Where one partner dies, the surviving person would be left without life cover under that policy. Applying for life insurance at that point may be expensive because premiums increase with age. If health deteriorates it may become more difficult to get insurance coverage.