Joint First-to-Die Life Insurance – Is it Right for You?

When purchasing a Life Insurance policy with another person, such as a spouse or business partner, you have two options:

1.) You can elect to purchase two individual policies (“two pots of money”) or,

2.) You may choose to purchase a joint first-to-die policy (“one pot of money”)

Many people will elect to purchase two individual policies, as the cost difference is usually insignificant. Before making this decision, it is important to weigh the pros and cons of a joint first-to-die policy versus having two individual policies.

What many parents are afraid of is the possibility of dying together in an accident and only being able to leave $500,000 to their children’s named trustee if, for example, they have elected for a $500,000 joint first-to-die policy. If that same couple had two separate policies ($500,000 each), $1,000,000 would be paid out to their children’s trustee if they were both to pass away together. What many insurance agents and clients are unaware of is the fact that some insurance companies will actually pay out 2x the death benefit under a joint policy if both insureds were to die within a certain timeframe of one another (i.e. 30, 60, or 90 days). Knowing this, a joint policy can sometimes be more attractive for clients.

It is also important to know that if you have a joint first-to-die policy and your spouse or business partner passes away, many insurance companies include the right for the remaining insured person to convert their coverage to an individual policy without any medical evidence, within a limited timeframe. This way, you are not left without insurance or left with the worry of having to qualify medically for a new policy, especially if you have developed a health issue or have had a lifestyle change (i.e. smoking) since the time that you had purchased your original policy.

There are a few key downfalls of a joint policy, which both relate to the flexibility of the coverage. By having two separate term life insurance policies, if one or both of the insureds were to develop a health issue, then the option to individually change the coverage exists. With most insurance companies, they will allow you to either purchase a longer term policy (usually within the first 5–7 years non-medically), or convert the policy to lifetime policy (non-medically). These options are referred to as a “term exchange option” and a “convertibility option.” Under a joint policy, you would both need to convert your coverage from a term policy to a lifetime policy, which could make the coverage unaffordable altogether. Therefore, if one or both of the insured people were to develop a health issue, individual policies offer much more flexibility and security.

Also, with high divorce rates, nowadays, it can sometimes be difficult to change a policy into two individual policies when spouses split and are both named as owners on the policy. Although many people don’t like to think about this, it is always important to plan for the worst and hope for the best. When spouses separate, it can sometimes be difficult to ensure that the other spouse continues to pay the premiums to the insurance company to keep the coverage in force for the sake of their dependents.

For the small difference in cost, it usually makes the most sense to buy two individual policies as they offer the greatest coverage and flexibility.

Article Written by: Jack Larmond