Married couples can get separate individual life insurance policies, but there are also joint life insurance policies geared towards married people and couples. According to Mark Williams, CEO of Brokers International, joint life insurance policies can be beneficial for high-wealth couples seeking to lessen the impact of inheritance and estate taxes on their beneficiaries.
There are two types of joint life insurance: “first to die” and “second to die.” Second to die joint life insurance is also known as survivorship life insurance, because both people must die before beneficiaries receive the death benefit.
Survivorship life is a joint life insurance product based on two people with an insurable interest where both people must die before death benefits are paid. 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.”
A “second to die” survivorship life policy doesn’t pay death benefits until both people die. Williams gave the example of grandparents with a survivorship life insurance policy that lists the grandkids as beneficiaries. The grandkids will not receive the death benefit until both grandparents pass away.
A “first to die” joint life 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.
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. This is why permanent life insurance is considerably more expensive than term life insurance. A permanent joint life insurance policy will be more expensive than a term life policy due the cash value component.
Williams said that survivorship life 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 survivorship life insurance is good for couples 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 survivorship or “second to die” life insurance 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.
Beyond the fact that the death benefit won’t pay out until both covered individuals die with a survivorship life insurance policy, there’s another potential downside.
Divorce is tricky with joint life insurance 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 survivorship life insurance, talk to your insurance agent about your options in case of divorce or legal separation before getting the policy, especially if you have a permanent policy with cash value.
Williams said that joint life insurance isn’t going to cost much more than buying an individual policy. However, survivorship life insurance is probably not right for all couples. It is best to talk to your agent to discuss whether joint life insurance is an option.
If it is, you need to choose whether you want a term or permanent survivorship life policy. Also, be sure to discuss 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.