Joint First to Die Life Insurance: How Does It Work?

Did you know there are life insurance products that insure two people under one policy?

One such product is joint first-to-die life insurance, which can be a smart option for couples in certain situations. This product pays out when the first person in a couple dies, ensuring the surviving partner receives replacement income to keep the family afloat and pay off any debts.  

Continue reading to find out how joint first-to-die life insurance works and if it is right for you.

What is Joint Life Insurance?

Joint life insurance covers two people, but pays out only once. Like an individual life insurance plan, it provides financial support to your family after you or your spouse dies. Generally, married couples buy a joint policy, but you do not have to be legally married to be able to access joint life insurance. Domestic partners can also take out a joint life plan, and so can business partners. In fact, if two individuals have insurable interest, such as shared assets, they are eligible for joint life insurance.    

A joint life policy requires a single application and the death benefit is paid out only once. Generally, the pay-out is in the form of a tax-free lump sum. Your beneficiaries can use the proceeds to pay for everyday living costs, cover debts, or however they like. The coverage ends when the policy pays out.

Most joint policies are permanent life insurance. A permanent plan provides life insurance cover for your entire life and includes an investment component — called cash value — that earns interest. Some insurers also offer joint term life insurance, but it is not so common. Term life insurance, in contrast, lasts for a specific duration, has no cash value, and pays out only if you or your spouse die during that period.  

Joint life insurance policies are either joint first-to-die or joint last-to-die.

• Joint First-To-Die

A first-to-die policy pays the entire death benefit amount when the first partner passes on. The payout can help the surviving partner to payoff a debt and/or replace the loss of income. A first-to-die plan can be useful for business partners as well. They can use it to fund a buy-sell agreement so that their business does not experience a financial crisis if either of them passes away.

Once the insurance carrier issues the death benefit, the policy terminates. If the survivor still wants life insurance protection, they will need to apply for a new policy.

• Joint Last-To-Die

Joint last-to-die life insurance defers the payout until the second insured passes away. After the death of the first insured, the surviving partner must continue making premium payments to keep the policy in force. Because the surviving partner does not receive any financial support, a joint last-to-die policy is not suitable for income replacement or debt management. Most couples take out such a policy to leave an inheritance for their children or grandchildren.

Joint last-to-die life insurance is also known as second-to-die or survivorship life insurance.

Joint First-to-Die Insurance and How it Works

A joint first-to-die policy covers the lives of two people.When the first insured passes on, the insurance carrier issues the death benefit to the surviving partner or the named beneficiary.

When the first insured dies, it generally leaves the living partner without life insurance coverage. Some providers include a provision for the surviving partner to convert the plan into a permanent policy without taking a medical exam. Keep in mind the new premium will be higher than the previous rate since life insurance becomes more expensive as you age.

The conversion option is available only for a short period, usually 30-90 days following the death of the first insured. Also, not all insurance carriers offer this option. If it is not available, the surviving spouse must apply for a new policy if they want to continue to have life insurance coverage.

Generally speaking, young families use joint first-to-die life insurance for paying off debts and income replacement because the surviving spouse can collect the payout tax-free.

Who Needs Joint First-to-Die Life Insurance?

Buying joint first-to-die insurance can make sense in certain situations such as:

• You cannot afford two individual policies

The most common reason for couples to buy a joint life policy is to get affordable coverage. Generally, it is cheaper than two separate policies. If your budget cannot accommodate two individual policies, a joint policy can be a good option to ensure your family has optimal protection.

• Your policy’s cash value is part of your retirement plan

Permanent life insurance builds cash value besides providing lifelong coverage. You can tap into it any time you want and use the funds as you like. Many people use their policy’s cash value to fund retirement. If that is your long-term plan as well, consider a permanent first-to-die policy. It can cover you and your spouse at a reasonable cost, and when it accumulates enough cash value, you can surrender it to supplement your retirement income.

• You or your spouse do not qualify for an individual policy

If one of you does not qualify for an individual policy because of poor health, applying for a joint policy makes sense. The less healthy partner may be able to get life insurance coverage with joint life insurance, which they otherwise might not.

What to think about before buying a joint first-to-die life insurance policy?

Before taking out a first-to-die policy, there are a couple of things to consider.

• Eligibility

Like individual life insurance policies, joint plans may have certain eligibility requirements. You may not receive an approval if you have certain diseases or illnesses, are above a certain age, or participate in extreme activities.

• Features

Features may vary from one joint first-to-die life insurance policy to another. Make sure you are getting the coverage your family needs.Find out about add-ons that can help you customize your plan to better suit your situation.

How much does it cost?

In most cases, a joint first-to-die policy is likely to be less expensive than two individual policies. However, the exact cost to you depends on a number of factors such as:

• Age: Life expectancy decreases with age. So, the younger you and your partner are, the lower your premium rate will be. Life insurance companies reserve their best rates for young, healthy applicants.

• Health: If you or your spouse has one or more underlying health issues, the premium rate will go up. The insurance provider may also look at the family medical history of you two when you apply.If either of you have a family history of health conditions such as diabetes, heart-related issues, or dementia, the cost will increase.

• Smoking status: On average, smokers die 10 years earlier than those who do not smoke. If any of you smoke, brace yourself for higher premiums. Generally speaking, smokers pay two to five times more for life insurance coverage than non-smokers.  

Pros and Cons of joint first-to-die life insurance

Pros‍

• It is typically more affordable than two separate policies

In most cases, a joint life insurance policy is less expensive than two individual policies. If you need coverage for both yourself and your spouse but want to keep the cost low, a first-to-die policy may be right for you.

Joint first-to-die life insurance can also be a good option if you and your spouse earn roughly the same amount. Since the household is as dependent on your income as on your spouse’s, it is important that both of you are covered. If either of you dies prematurely, the living partner will need the same level of financial support to ensure the family lives comfortably. In such a situation, a first-to-die policy is likely to be less expensive than two individual policies having the same death benefit amount.

• It allows someone with health issues to secure coverage

If either of you has health issues that make it difficult to buy an individual life insurance policy, a joint plan can be a worthy option. It allows the less healthy partner to secure life insurance coverage, which otherwise might not be available to them.

• Insurance for the living spouse

Many first-to-die life plans include a provision for the living spouse to buy an individual policy. This option is usually available fora short period, usually between 30 to 90 days following the death of the first insured. No medical exam is required but the living spouse should be below a certain age, usually 70 years.

This provision can prove beneficial if the living spouse has developed health conditions that make them uninsurable. The maximum death benefit available is equivalent to the policy amount of the original joint life insurance plan. So, if the original coverage was for $1 million, the surviving spouse can take out a million-dollar policy or less.

Cons

• Joint life insurance policies are not easily split when couples separate

A divorce, unlike death, is not a certainty, but the fact is couples do separate. If that happens, a joint life policy can complicate matters.

Some insurance carriers offer a rider that lets couples split their joint life plan into two separate policies, provided they are under a certain age and apply within a specific period after divorce or separation.However, not all life insurance providers have this provision. If your policy does not include it, options are rather limited.

One option is to let the policy lapse. If you have a permanent joint life policy, you can split the cash value equally.

However, this option may not work if either of you has health problems. Life insurance premiums go up as you become older, but if you also have health issues, the cost can be severely high. Worse, you may not be able to take out a policy with a substantial death benefit.

In this situation, it may be better if the less healthy partner completely takes over the policy so that it covers only them. The other partner will then need to apply for life insurance afresh if they still want coverage.

• You are not likely to save much if either of you has health issues

If one partner has health problems, you are not likely to enjoy significant savings by taking a joint policy instead of two separate policies.

Life insurance companies reserve preferred rates, which can be up to 30% lower than standard rates, for applicants who are in good shape.

But here is the deal: You cannot get approval for preferred rates unless you are in excellent health and have a clean family medical history. Getting approval for preferred rates on an individual policy is hard enough. But with a joint life plan, the chances are considerably lower because both of you must qualify.

If your spouse is approved for preferred rates but you receive a ‘standard’ health rating due to health concerns, the insurer will issue the joint policy at standard premium rates.

With an individual life insurance policy, at least one of you would have been able to enjoy some savings.

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Conclusion

Joint first-to-die life insurance covers two people and pays out upon the death of the first insured. It can be a good option for couples and other people who have shared assets.

Since not all joint policies are the same, compare as many policies to ensure you are getting the exact coverage your family needs at an affordable price. Generally, you cannot get a quote for a joint first-to-die policy online because online quoting tools are designed for individual policies. So, if you want to find out which insurer offers the lowest rate, get in touch with a life insurance expert at Dundas Life. We work with top Canadian insurance carriers and can help you secure the best rate.