One type of life insurance that many people do not consider is joint life insurance. With a joint life insurance policy there are two or more insured people on one plan instead of just one insured person.
There are several main types of joint life plans: “joint first to die” plans, “joint last to die” plans and “combined” plans. Note that joint life insurance plans can be either term life or permanent life insurance.
Joint First to Die Life Insurance Plans
A joint first to die life insurance plan insures at least two people and the policy pays out to the beneficiaries (usually the insured persons) after the first insured person dies.
Joint first to die plans are ideal if a substantial amount of money will be needed by survivors after only one person passes away.
This type of plan makes sense for married couples, especially those with children, when both parents work and are the “breadwinners”. In this case it doesn’t matter which parent passes away: the policy pays out immediately and replaces the lost parental income.
Note that joint first to die plans are not suitable if it is critical that both parents have life insurance. A surviving spouse may be able to convert their first to die plan into a single life insurance policy (depending on the insurance company), but premiums will be based on the surviving parent’s age at the time of conversion.
The cost savings for a first to die plan compared to the sum of two individual policies is approximately 3% to 5%.
As an aside, some (not all) first to die plans will pay out two death benefits if both insured persons pass away at the same time (e.g. both in a fatal vehicle accident).
Joint Last to Die Life Insurance Plans
A joint last to die life insurance plan insures at least two people and pays out the death benefit to the listed beneficiaries only after the last insured person dies.
Joint last to die plans are ideal if a substantial amount of money will be needed by survivors only after both parents pass away.
A joint last to die life insurance plan makes sense when dealing with estate management since the purpose of estate management is to leave as much money as possible to your heirs while paying the government as little money as possible. A joint last to die plan helps with this since income tax on any capital gain is deferred until the surviving spouse passes away.
A joint last to die life insurance plan does not make sense if both parents are working and contributing to the family income. In this case the death benefit is needed after the first parent dies, in which case a first to die plan or a combined plan is more appropriate.
To determine the cost of a last to die plan life insurance companies calculate the ESLA of all insured persons, an acronym for Equivalent Single Life Age. Each life insurance carrier does these calculations slightly differently from one another, which accounts for the price variations of joint life insurance plans. For this reason make sure you shop around and get many quotes for joint life plans before purchasing your coverage!
Note that last to die life insurance plans are considerably cheaper than first to die life insurance plans.
Combined Coverage Life Insurance Plans
A “combined coverage” life insurance plan has two or more beneficiaries, similar to a joint first to die plan.
However, unlike first to die plans a combined coverage plan actually pays out two death benefits and not one. This is true even if both parents pass away simultaneously.
There is usually a discount on combined plan premiums since there is more than one person listed on the plan (can be up to 3% in savings).
After the first insured person passes away the surviving spouse can continue with the life insurance plan at the original premium rates and without any underwriting or application required. This is particularly important if two spouses have a substantial difference in their ages.
Joint life insurance plans do save people some money on premiums when compared to individual life insurance plans.
Joint life plans should be considered if life insurance is needed when one of the insured person dies. Individual plans or a combined life insurance plan should be considered when it is critical that death benefits be paid out for all insured persons.
We hope you found this Life and Finance blog article helpful. If you have any questions please call us toll-free at 1-866-369-4474. As licensed, experienced Canadian life insurance brokers it is our mission to assist!