The most common form of life insurance coverage is single life or individual life insurance, and while there are many types of life insurance options, many Canadians are unaware that joint life insurance could be their best option for personal or business income protection needs as well as estate preservation.
Understandably so, no one wants to think about their own demise or the chances of premature death ever occurring, hence, no one really likes to talk about life insurance planning. Unfortunately, it’s a fact of life that people die, hopefully not during our active working years, but yes, everyone dies at some point, hence, financially planning for it is of vital importance.
Premature death often affects the financial well-being of the bereaved household that results in not being able to afford the same lifestyle and future than when the deceased was alive. Life insurance is an effective risk management tool that offers a safety net against this financial risk.
What is Joint Life Insurance?
Joint life insurance is a life insurance policy that covers two lives insured (two people) in one insurance coverage. This is like multi-life insurance where there are various lives insured, the difference is that a joint life policy only pays out once, when one of the lives insured pass-away.
Typically, joint life policies are taken out by couples to protect their household’s income or to leave a legacy to their next generation. Business partners, on the other hand, have also been known to take out joint life policies, to protect the future of their company in the event of premature death of one of the partners.
Joint life insurance can be permanent or term life insurance policies, with the former providing lifetime coverage for the insureds, this means that the policy continues throughout the life-insureds’ lifetime, until a claim is made.
Two Types of Joint Life Insurance
There are two types of joint life insurance policies, one pays out on the first death, and the other pays out when the last of the two lives-insured pass-away.
Joint First To Die
Joint first-to-die insurance is a life policy where, as the name suggests, the death benefit is paid out following the first death of either of the individuals insured under the policy.
Such policies are most helpful to those who have high financial obligations, such as the case of young families where young children are dependent on the breadwinners’ financial support and where mortgage obligations are high. Usually, there are two parents who help each other out by actively working to provide for their family’s needs and guarantee their children’s future.
As you may know, death is one of those uncanny life events that we don’t have control over. Premature death may affect the family’s financial well being, where only one of the parents are left to support the surviving loved ones and no income protection in place, it’s inevitable that the family may encounter financial difficulties. A well-planned joint first to die life insurance may provide cost-effective income protection for the family against the financial risks of premature death.
Joint Last To Die
In contrast, joint last-to-die life insurance policies only release funds following the death of the last life insured in the policy. Many people opt for such policies to leave a financial legacy to their children or to cover estate taxes that may arise upon the disposition of assets upon death. They are also useful to fund any costs associated with death, e.g. a funeral or interment costs. Moreover, if an adult child will require continued care, such a policy can provide the necessary funding.
Joint Life Insurance for Couples
By far the most common form of joint life insurance. Some couples want to simplify their life insurance, so rather than taking out separate policies, a joint first to die life insurance is an excellent option for income protection and estate preservation purposes.
Such joint policies are frequently cheaper than buying two distinct coverages and require less paperwork. Further, the flexibility of the different joint policies means there are options for couples with young children, or older couples hoping to leave a legacy to their adult children.
Joint Life Insurance Pros and Cons
There is always one looming factor hanging over purchasing life insurance: cost. Put simply, is what you are spending worth the potential return? As mentioned, one of the critical benefits of joint life insurance is the reduced overall cost. Typically, these policies are cheaper than their counterparts. Plus, many find that they get more coverage for their money.
However, there needs to be a consideration of whether to opt for joint life or single/individual coverage, as there are a few downsides to joint life insurance policies that most clients fail to consider. For instance, joint life policies only pay out once, either on the first or the last death of any-one of the insureds depending on the contract.
There are cases where people are sold joint first or joint last to die life insurance policies and they were under the impression that the life insurance will pay out upon the death of each of the lives insured.
The very important thing to keep in mind when implementing any type of joint life insurance policy is that it only pays out once, either in the first death or the last death of the lives insured.
To mitigate the risk where one of the lives insured loses coverage, either because a joint first to die policy has already paid out on the first death or were the first death occurs but the joint last to die insurance will only payout on the last death, it is important to use joint life insurance in conjunction with another life insurance coverage where both couples or partners are insured.
Most of the time, our clients use joint life to protect their household against the potential loss or reduced income or to pay off their mortgage obligation in case of premature death (joint first to die) or to leave a legacy (joint last to die).
Since joint life insurance only pays out once, it is advisable that each of the lives insured should have single permanent life insurance for final expense purposes, so all lives insured will have coverage at death.
Joint Life or Single Life Insurance?
A significant problem with joint-life insurance policies is the fact that they only pay out once. If budget is not a concern, single life insurance policies offer more flexibility, not to mention the individual payouts. This means that each of the lives insured has his or her own life insurance coverage.
In the event that one of the lives insured pass-away ahead of the other, the remaining life insured will still have coverage where coverage is no longer available once a joint first to die policy pays out following the first death.
In most instances, you pay more for single life insurance policies since you’re paying for two benefits but since there are two benefits, the overall payout is usually more than when you implement a joint insurance policy.
As I briefly mentioned above, it sometimes makes sense to combine joint life insurance with two separate final expense insurance policies, with the joint life insurance protecting the family’s financial well-being against loss of or reduced in income following the death of one of the breadwinners, for mortgage protection or estate preservation purposes. Since the joint policy will only pay out once, it means that one of the spouses or partners will be left out without coverage, having a separate final expense policy makes sure that both spouses or partners are covered.
The final expense coverage is usually permanent life insurance that will cover the life insured throughout his or her lifetime and only usually amounts to between $25,000 to $100,000. The bulk of the coverage may remain on the joint life insurance policy, especially if the purpose of which is income protection, which can be a 20-year term or a term to age 65 policy.
We Can Help
A well-thought-out life insurance policy makes it a point that you have your ground covered. Whether you’re looking to implement joint life insurance to financially protect your loved ones against your mortgage obligation, loss of or reduced in income, looking to preserve your wealth, pass on a legacy, or fund a buy-sell agreement, we can help you explore life insurance options that meet your needs. Simply fill out the form below and we’ll get back to you to arrange a meeting that works with your schedule.