Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, like American Express, but our reporting and recommendations are always independent and objective.
The well-being of children, spouse, and other family is a motivating reason for most to get life insurance — to cover the mortgage, education, and other expenses so that their family can continue after they die. It is also useful for business partners; in case one partner dies, the business can continue.
Certain life insurance products are geared towards married people, couples, and business partners, and these are known as joint life insurance policies. Married couples can get separate individual life insurance policies. However, joint life policies are beneficial for high-wealth couples seeking to lessen the impact of inheritance and estate taxes on their beneficiaries, according to Mark Williams, CEO of Brokers International.
Joint life insurance is based on two people with an insurable interest (such as a married couple or business partners). If you want to buy life insurance on someone else, you must have an insurable interest in their life, meaning you will suffer if they die.
An individual life insurance policy pays beneficiaries when the insured dies. However, joint life insurance can be based on “first to die” or “second to die.” Williams said that joint life insurance is also referred to as “second to die” or survivorship life insurance if the death benefits don’t pay out until both people die.
Joint life insurance can be a term life or permanent life insurance policy.Unlike term life insurance, which only lasts for a specific timeframe, permanent life insurance never expires. Also, permanent life insurance has a cash value component in addition to the death benefit. A permanent joint life insurance policy will be more expensive than a term life policy due the cash value component.
First to die
A “first to die” joint life insurance policy pays the death benefit when the first person dies. For example, if a husband and wife have a joint life policy and the husband dies first, the beneficiary will not have to wait until the death of the wife to receive the death benefit.
Second to die (survivorship life)
A “second to die” policy doesn’t pay death benefits until both people die. Williams gave the example of grandparents with a joint life insurance policy that lists the grandkids as beneficiaries. The grandkids will not receive the death benefit until both grandparents pass away.
Williams said that joint life “second to die” insurance is usually used by high-net-worth individuals to lessen the estate tax burden on inheritances. He said, “If you’re worth more than $6 million you could have an estate tax problem if you leave the entire estate to your kids because the estate tax is due within nine months and must be paid in cash.” He noted this might require your kids to sell what they inherited to pay taxes. However, life insurance proceeds are received income tax-free.
Williams said that joint life insurance is good for couples and business owners. He noted that joint life “second to die” insurance works well if there’s a disparity in age between couples, because the policy will be based on an average of their ages and health, which is a better deal than buying separately.
He said that joint life “second to die” also works when one spouse is healthy and the other is not, because it is priced based on the healthy person. The insurance company calculates when they have to pay out, usually not until the healthy person dies.
If you have a “first to die” policy, if one spouse is unhealthy you will have higher premiums because the insurance company may have to pay out earlier. This is not an issue with “second to die” policies because the risk is assessed based on the healthy person’s life expectancy.
Joint life insurance is tricky with divorce, because the policyholder can change beneficiaries. Most spouses name the other spouse as beneficiary for life insurance. In a divorce, a person can remove an ex-spouse. However, if life insurance is used to insure alimony and child support payments, this should be a discussion with your divorce attorney to avoid legal problems.
For joint life insurance, talk to your insurance agent about your options in case of divorce or legal separation before getting the policy.
According to Williams, joint life insurance doesn’t cost much more than buying an individual policy. However, joint life insurance probably isn’t right for all couples. It is best to talk to your agent to discuss whether joint life insurance is a worthwhile option.
If it is, go over the differences between “first to die” and “second to die” policies and whether you want a term or permanent joint life policy. Also, be sure to discuss your options in case of a divorce before signing the policy. It would also be helpful to include your financial planner and accountant in these discussions to understand the tax benefits and outcomes.
Ronda Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.