Life insurance can be bought in several different configurations. The most common is on a single life, where a death benefit is paid out when the insured dies. Other configurations include joint last-to-die, where the death benefit is only paid on the last death of 2 or more insureds. The third most common configuration is joint first-to-die, in which the death benefit is paid upon the first death of 2 or more insureds. Joint last-to-die is suitable for estate planning strategies, but what is joint first-to-die life insurance used for?
Usage of joint first-to-die life insurance
The most common use for joint first-to-die life insurance is to cover debt, where a couple would like for the mortgage or other debt to be paid off in the event of either of their deaths. Since the surviving spouse may not be the breadwinner of the family, using a joint first-to-die policy can relieve the burden of debt payments. Even if the spouse is the main income earner, he/she can take an extended period of time off work to grieve without worrying about the debt load and income loss. At a time when the surviving spouse and the rest of the family are emotionally devastated, they shouldn’t also have to worry about financial matters.
The other reason for using joint first-to-die life insurance is when both spouses have similar income levels. Income replacement for either spouse can be accomplished with the same amount of life insurance coverage. Since income levels between spouses do not remain constant and can be affected by factors like promotions and job changes, having two separate policies tends to be more suitable for income protection.
A feature found in some insurance companies’ joint policies is the ability to convert a joint term policy into permanent insurance. The new policy can either be joint or separate, which provides more flexibility in case you need to split the policy in the future.
Most policies also include a survivor benefit, which provides continued coverage for the same amount for the survivor for 30-90 days after the first death. Survivors are allowed to purchase this coverage without medical evidence within these 30-90 days.
The main drawback of a joint first-to-die life insurance policy is the lack of flexibility compared to two single life policies. With some companies, you may not be able to split the joint life policy into two separate policies. Divorce or separation would be the main reason to do this. Although we never plan for divorce, the flexibility of being able to split the policy can be valuable, especially years down the road when health issues may preclude you from qualifying for a new policy.
The other drawback of a joint life policy is the lack of premium savings. Most people assume that since this type of policy pays only once, it should be significantly less costly than having two single life policies that pay twice. But because it pays on the first death, the probability that the insurance company has to pay a death benefit is similar to having two single life policies. Therefore, there is only about a 5-10% saving in premium for a joint policy over two single life policies.
As with joint last-to-die, a single equivalent age is used to determine the premium. This means that the ages of the two insured are used to generate a single equivalent age. For example, a 35 year old couple will have a single equivalent age of a 42 year old male. The premium for the joint first-to-die policy will therefore be equivalent to a policy for a 42 year old male. The single equivalent age varies with every insurance company, so it’s important to have an advisor shop for the lowest single equivalent age, which should lead to the lowest premium.
|Single equivalent age||42 year old male||43 year old female||59 year old male|
|Joint first-to-die premium (A)||$37.80||$73.35||$201.15|
|Male premium (B)||$24.75||$48.60||$130.50|
|Female premium (C)||$18.90||$32.40||$84.15|
|Total premium of male and female (B+C)||$43.65||$81||$214.65|
|Total premium of male and female |
minus policy fee of $4.5
|Premium savings of JFTD |
over two single life policies
Single life coverage can be combined under one policy to save on the policy fee of $4.5/month. The policy fee varies among insurance companies, so there may be even more significant savings elsewhere. As you can see, there is not a huge cost savings to using joint first-to-die over two single life policies. When you consider the fact that two single life policies pay twice compared to once with joint first-to-die life insurance, it makes more sense to go with single life policies.
Although joint first-to-die life insurance may be appropriate to cover mortgage debt, you should still do your due diligence. A quantitative analysis of it reveals that the benefits of suitability do not outweigh the drawbacks of the lack of flexibility and premium savings.
1. Quote from Transamerica. Rates are current as of November, 2014.
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