More on Life Insurance
More on Life Insurance
If you and your spouse plan to purchase life insurance, a joint policy might be a cheaper solution, but there are certain factors to consider.
Couples buying life insurance together have two options: they can each purchase separate policies, or they can buy joint life insurance, which is one policy that covers two people. It’s an option that not many people know about, and depending on your situation, it might be the right answer for you.
Joint life insurance is a life insurance policy that covers multiple people. Most joint life insurance policies are permanent policies, like whole or universal life insurance, that have cash values that can earn interest (or lose value).
Permanent policies can be more expensive, but the cash value can provide some flexibility. Other joint life insurance policies are term life insurance policies that expire after 20 or 30 years. Knowing the difference is important whenever you get life insurance. It determines how you’re beneficiaries will be paid and how long you’re covered. It can also determine your premiums, as permanent insurance premiums are generally higher than term insurance premiums.
When it comes to joint life insurance, there’s another important distinction to make: whether it's a first-to-die policy or a second-to-die policy, also known as survivorship policy.
First-to-die joint life insurance performs the same role as individual life insurance: mainly, it’s income replacement for your beneficiary or beneficiaries when the main breadwinner dies. In first-to-die life insurance policies, the benefit is paid when the first of the two spouses dies. It’s good for people with mortgages, young families, or anyone else who will still need money to keep up with the payments of everyday life if one of the breadwinners dies. First-to-die life insurance allows the surviving spouse to use the lump sum payment to pay bills or carry-on after the first spouse dies.
First-to-die life insurance policies are also like individual life policies in that once the lump sum death benefit is paid out by the insurance company, there’s nothing else to do with the policy. If the surviving member of the policy still wants to be insured, they’ll need to apply for another policy.
Also called survivorship life insurance, a second-to-die life insurance policy pays out the death benefit once both policyholders are deceased. After the second policyholder dies, the death benefit is paid to beneficiaries, just like with an individual policy.
Since there can be a long time period between when one policyholder dies and when the death benefit is paid, second-to-die life insurance doesn’t work as well as income replacement. Instead, survivorship policies work best as a way for families to pay for estate taxes, inheritance tax, or as a way for the policyholders to leave a legacy for their heirs, since both policyholders need to die before the death benefit is paid. Another disadvantage of a second-to-die life policy: the surviving spouse still has to pay the premiums even after the first policyholder dies (though if its a permanent policy, the cash value could help with premium payments).
Joint life insurance policies are much rarer than individual policies. For some couples, an individual policy makes more sense because they’ll only be insuring one member (the primary income earner). 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.
There are two reasons joint policies can be cheaper: 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% 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).
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. There are three main issues that they’ll probably bring up in arguing against getting a joint policy.
If you're trying to figure out what type of life insurance policy you need, there are some factors to consider. Joint policies can be cheaper than individual policies for the reasons mentioned earlier, but that isn’t always the case. If you know how life insurance premiums are set, then you know that your health 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.
On one hand, if one spouse has a pre-existing medical condition or in poor health, the premium on the joint policy could be higher than the healthier spouse buying his or her own policy. But if both spouses need coverage, the joint policy could be more affordable than buying two separate policies.
Also: if one of the members of a policy is considerably healthier or younger than their partner, the surviving spouse 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 just one topic that makes people uncomfortable – death – but also the possibility of divorce. Divorce, as messy as it is, can get even worse when you throw a life insurance policy of several hundred thousand dollars or more into the mix. If you do end up getting a joint life insurance policy, you should plan for the worst (besides, you know, dying) and see if your insurance company will include a rider that splits the joint policy into two individual policies in the event of a divorce.
Read more about life insurance for spouses.
Logan Sachon is the co-founder of The Billfold, a groundbreaking personal finance site for millennials that was named one of Time's 25 Best Blogs of 2012. Her work has been published in New York Magazine, Glamour, The Guardian, BuzzFeed and more.