We all know couples who do everything together: they dress in matching sweaters, finish each other’s sentences, enjoy the same bad movies, and are just the worst.
But are there some things that couples can do together that aren’t annoying? Like getting life insurance? Sure, they can buy their own policies, but we’re talking joint life insurance – two people covered by one policy.
It’s an option that not many people know about, and it might be worth it.
What is a joint life insurance policy?
Joint life insurance is a policy that covers multiple people. Some joint life insurance policies are term life insurance, meaning that the policies last for a specified time period, usually 20 to 30 years.
Most joint life insurance, though, is permanent universal insurance – up to 80% of the policies, MetLife estimates. What does that mean? Permanent universal insurance policies have cash values that can earn interest (or lose value). Check out this explainer of cash value policies for a more detailed look.
Knowing the difference between term and permanent is important whenever you get life insurance. It determines how you’ll be paid and how long you’re covered. When it comes to joint life insurance, there’s another important distinction to make: whether the policy is first-to-die or second-to-die.
First-to-die joint policies perform the same role that individual life insurance policies do: mainly, it’s income replacement for beneficiaries when the main breadwinner dies. It’s good for, say, people who are anticipating needing to send kids to college or pay off debt.
It’s also like individual policies in that once the death benefit is paid out, there’s nothing else to do with it. If the surviving member of the policy still wants to be insured, they’ll need to apply for another policy.
If first-to-die policies kick in when the first person dies, you can probably guess when second-to-die policies go into effect. Also called survivorship policies, the death benefit for these policies is paid out once both policyholders are deceased.
After the second policyholder dies, the death benefit is paid to beneficiaries, just like with an individual policy. But survivorship policies, since both policyholders will die before the death benefit is paid, work best as a way for families to pay for estate taxes, burial plans, or as a way for the policyholders to leave a legacy for their heirs.
Since there can be a long time period between when one policyholder dies and when the death benefit is paid, it doesn’t work as well as income replacement. That’s why it’s not as recommended as first-to-die policies for people with mortgages, young families, or anyone else who will still need money to keep up with the payments of everyday life.
When a joint life insurance policy is right for you
"No thanks, my spouse and I will just get individual policies," you say.
And that’s a perfectly valid course of action! Joint life insurance policies are much rarer than individual policies. For some couples it’s just because they’ll only be insuring one member (the primary income earner), and for others they don’t want to deal with the caveats that come with a joint policy (more on that below).
But if both spouses are going to be insured anyway, you may want to look into a joint policy because in some cases it can be cheaper than buying two separate individual policies.
This is for two reasons, one that works in your favor and one that doesn’t. First, it’s cheaper for an insurer to underwrite two people at the same time. Second, with survivorship policies, the insurer knows it’ll likely be longer before the death benefit is paid out since both policyholders have to die before that happens. That means more premiums paid and, for the 20 percent of joint policies that are made up of term life insurance, a higher chance that the death benefit won’t be paid out at all (because the policies will expire before the policyholders do).
The argument against joint life insurance policies
Joint policies can be cheaper than individual policies for the reasons mentioned earlier, but it isn’t always the case.
If you know how life insurance premiums are set, then you know that your health when you apply plays a huge role. That’s normally fairly straightforward, but it gets complicated with a joint policy because the insurance company is calculating the risks for two different people.
If one of the members of a policy is considerably healthier or younger than their partner, they might end up paying a lot more over the life of a policy than they would if they were to get their own policy.
You – or, more accurately, your beneficiaries – also need to wait longer for the death benefit payout in the event of a survivorship policy. Normally benefits are paid out once the policyholder dies, but if beneficiaries have to wait until both policyholders pass, it can add years (or decades) before the death benefit is paid.
This can sometimes be circumvented by adding a first-to-die to a survivorship policy, where a portion of the death benefit will be paid out when the first person dies and the remainder paid out after the second person dies. Still, you wouldn’t be getting the full amount all at once, so if someone is depending on that money, it’s not ideal.
And remember that most joint life insurance policies are permanent policies (rather than term). Even though it can be cheaper to get a joint policy than two individual permanent policies, permanent policies are typically much more expensive than term policies, so a joint policy still might not be your most cost-effective option. Plus, the cash value aspect means that they can oftentimes get more complicated than they’re worth when compared to more straightforward term life insurance policies.
Finally, you have to consider that joint life insurance policies deal with not one topic that makes people uncomfortable – death – but also the possibility of divorce.
Divorce is messy as it is. When you throw a life insurance policy of several hundred thousand dollars or more into the mix, it can get even worse. That’s why if you do end up getting a joint life insurance policy, you should plan for the worst (besides, y’know, dying) and see if you can include a rider that splits the joint policy into two individual policies in the event of a split.
There’s a place in the world for joint life insurance policies, but they work best in specific situations. You should talk to your independent agent or broker to see if it’s the right financial move for you and your family’s protection.
Photo: Daniel Gasienica