The who, what and why of joint insurance policies

Life insurance can protect your family if something should happen to you, covering the cost of a mortgage, post-secondary education or simply income replacement. It can also help pay your final expenses and even minimize taxes and preserve your estate for your loved ones.

However, there’s a cost involved, and married couples looking for a way to keep it in check just might want to consider purchasing joint life insurance, rather than two separate individual plans. Since joint policies allow two people (typically spouses) to share in one life insurance plan, they almost always lower your monthly premiums.

Read on for some nuts-and-bolts information about joint insurance policies, along with how to decide if they’re right for you.

What flavour to choose? Joint insurance policies come in two basic types, namely first-to-die and second-to-die (also known as survivorship). 1

First-to-die policies pay the death benefit tothe surviving spouse once the first spouse dies. You’d use them in the same way you’d use an individual life insurance policy; to pay off debt and keep your family financially afloat. Once paid out, a first-to-die policy is wrapped up, so if the widow or widower wants to continue to be insured they have to apply for a policy of their own. 2

If you purchase a second-to-die policy, on the other hand, it will pay a death benefit to your heirs only after both you and your spouse die. 3
Since there could be many years between your deaths, this option doesn’t work well if you have young kids, a mortgage and other expenses to pay.  Second-to-die policies are best used as a way for families to pay estate taxes and burial costs and to leave an inheritance to children and grandchildren.

A joint insurance policy can be cheaper than an individual policy 4 for two basic reasons. First, it’s less expensive for your insurer to underwrite two people at the same time. 5 Second, in some cases, the insurer will be able to collect premiums for a longer period of time before having to pay out the death benefit.

When you might stay away from joint policies. Although they can be cost-effective, joint policies don’t suit everyone. You might want to steer clear of a joint policy if:

  • You only want to insure one spouse: Many couples are primarily concerned with insuring the main breadwinner (if there is one) – you might want to think twice about this strategy. Stay-at-home parents may not be earning a salary, but they can be costly to replace if you have to pay for all the ‘services’ they perform, from childcare to cooking and cleaning.
  • One spouse is significantly older or less healthy than the other 6:  Insurance companies set premiums based on the risk that someone will die while the policy is in place. But with joint policies, that can get complicated because the insurer has to calculate the risk for two individuals. If your spouse is much older, a smoker or has other risk factors, it could push up the price of the policy for both of you. In that case, you might be better off with an individual policy.
  • Your marriage is on the rocks: Divorce is no fun at all.7 Aside from splitting all your other assets and arguing over the children, with a joint policy, you have to decide who owns it. Many couples opt to cancel the policy on divorce and take out individual policies of their own, but that assumes you’re healthy enough to get the coverage you need at a price you can afford.

Not sure what kind of policy to opt for? With help from your insurance agent/advisor you can come up with the right decision for yourself.

Sources:

[1] https://www.insuranceandestates.com/survivorship-second-to-die-life-insurance/

[2] https://www.canada.ca/en/financial-consumer-agency/services/insurance/life.html

[3] https://www.bankrate.com/finance/insurance/joint-life-insurance-policies.aspx

[4] https://www.canada.ca/en/financial-consumer-agency/services/insurance/life.html

[5] http://www.wealthmanagement.com/insurance/insuring-two-lives-cheaper-one

[6] https://www.policygenius.com/blog/joint-life-insurance/

[7] http://www.yourmoney.com/insurance/single-joint-life-insurance-policy-couples-choose/

 

416120 CAN/US/UK (03/18)

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Camilla Cornell

Camilla Cornell is an award winning freelance writer. She writes about all aspects of personal finance, from the real cost of raising kids to budgeting, insurance and retirement planning. Her articles have appeared in The Globe and Mail, Financial Post, MoneySense and Today's Parent, among other publications.