How does a joint life insurance policy work?
A joint life insurance policy works by covering 2 people under 1 policy, usually couples, common-law partners, or business partners. With this type of policy, you only need to apply once for both people. You also pay 1 premium per month, which can be convenient for budgeting. Depending on the type of policy you’ve chosen, the insurance pays out either when the first person dies (joint first-to-die) or when both people die (joint last-to-die).
It’s important to note that once the policy pays out, it usually terminates, as it's designed to provide financial protection for a specific period.
Additionally, joint life insurance can be set up as either a permanent or term policy. Permanent policies offer lifelong coverage, while term policies provide coverage for a specified period, such as 10, 20, or 30 years. This flexibility allows you to choose the option that best suits yours and your family’s needs and financial goals.
What is joint-first-to-die life insurance?
This is a type of policy where the insurance pays out when the first person, of the two people covered by the policy, dies. This means that if your partner passes away before you, the policy provides a lump sum payment to you to offer immediate financial support in their absence. This money could help you pay for funeral costs, mortgage payments, child expenses, or bills.
When applying for this type of insurance, both you and your partner need to go through the application process together. This usually involves providing information about health and lifestyle habits. The good thing is that the application process is often simpler than getting 2 separate policies, which can make it more convenient for you both when trying to secure your financial future together.
What is joint-last-to-die life insurance?
Last-to-die life insurance, also known as survivorship life insurance, pays out the death benefit only after both policyholders have passed away. This means that neither you nor your insured partner will receive the benefit, but instead it will go to your designated beneficiaries. When the first insured person dies, the surviving person must continue paying the premiums to keep the coverage.
This type of insurance is commonly used for estate planning, where the death benefit can be used to help your adult children offset any estate expenses owed after you’re gone.
Let’s look at an example. Sarah and David had a joint-last-to-die life insurance policy with a death benefit of $500,000. After both Sarah and David passed away, their daughter Emily, as the beneficiary, receives the payout. With the $500,000, Emily can use it to settle any outstanding debts her parents had, cover funeral expenses, and provide financial stability for herself. For instance, if there were outstanding debts totalling $50,000 and funeral expenses of $20,000, Emily could allocate $70,000 for these immediate needs. With the remaining $430,000, Emily might choose to invest some of the funds for the future, such as contributing to a college fund for herself or saving for a down payment on a house. Additionally, she could consider using a portion of the money to honour her parents' by donating to a cause they cared about. The payout from the last-to-die joint life insurance policy helps Emily manage the financial aspects of her parents’ passing and provides her with a foundation for her future financial goals.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
Pros and cons of a joint life insurance policy
Pros
- Cost-effectiveness: By covering you and your partner under 1 policy, premiums may be lower than purchasing separate policies.
- Convenience and simplicity: With just 1 policy to manage and 1 premium to pay, it’s easier to keep track of and budget for insurance expenses.
- Flexibility of policy types: Whether you opt for a joint first-to-die or joint last-to-die policy depends on your specific financial goals and circumstances, allowing you to tailor the coverage to meet your needs. You can also add additional benefits, called riders, for disabilities and other specific situations.
- Security: Joint life insurance can provide you with confidence knowing that both of you are financially protected, whether it’s to replace lost income, cover debts, or provide for dependents in the event of 1 of your passings.
Cons
- Divorce or separation can complicate things: If your relationship ends, deciding what to do with the policy can be challenging and may require changes to the coverage or beneficiaries. An advisor can help you navigate this.
- Only 1 payout: Joint life insurance typically pays out only once, either upon the first or second insured person's death, depending on the policy type. This means that if the surviving partner outlives the policy, they may be left without coverage when they need it most.
- Equivalent single age (ESA): The equivalent single age used to calculate premiums for joint policies may result in higher costs compared to individual policies, particularly if there’s a significant age difference between you and your partner. These factors should be carefully weighed when deciding whether joint life insurance is the right choice for your financial planning needs.
Is a joint life insurance policy right for you?
If you’re considering whether to get a joint life insurance policy, there are several important factors to keep in mind:
Think about how the policy payout works, and whether it pays out when the first or second person passes away. This decision affects when your beneficiaries receive the death benefit.
Consider the responsibilities of the remaining partner. In a joint first-to-die policy, the remaining partner may need to manage finances alone after the other passes away, whereas in a joint last-to-die policy, both of you share this responsibility until you both pass away, and if 1 partner passes away, the other partner is still responsible for paying the premiums.
Think about how altering joint plans may affect the policy. For instance, divorce or separation could complicate matters if the policy isn’t updated accordingly. You’d need to see if your policy includes a separation benefit that would allow you to split your joint policy into 2 individual policies if you’re going through a divorce or separation. With this you can:
- Name each spouse as the beneficiary in trust to manage the financial benefit on behalf of the kids
- Keep the policy as-is (don’t split it)
- Transfer the policy to 1 spouse
- Cancel the policy outright
- Speak with an advisor about any specific questions about divorce and joint life policies.
Do you need to add more coverage to your policy? If you require additional coverage for disability or another specific situation, some policies will offer additional benefits tailored to specific needs.
Your coverage can also be customized to suit your individual needs, financial obligations, and desired level of protection which involves both financial protection and debt protection. Creditor insurance can also be a good alternative for debt protection.
If you and your partner are searching for a life insurance plan that is straightforward, convenient to apply for, and provides a single payout, joint life insurance could be the ideal option for you.
However, it's important to note that joint life insurance offers less coverage compared to other policies like term life insurance, universal life insurance, or whole life insurance. So, as a result it's crucial to carefully evaluate your alternatives before reaching a final decision.
If you’re uncertain about the most suitable life insurance for you and your partner, an advisor could help you make the right decision.