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Are you and your partner considering joint life insurance for shared financial protection? Let’s dive into what you need to know about joint life insurance; from understanding how a policy works to comparing its costs with individual coverage.
A joint life insurance policy covers two individuals, typically designed for spouses or domestic partners, and can be a form of permanent life insurance that stays effective as long as premiums are paid.
It often presents a more cost-efficient solution compared to individual policies because it involves a single policy with a lower potential payout for the insurer.
There are two types of joint life insurance policies:
- First-to-die
- Second-to-die
These cater to different needs like shared financial responsibilities or estate planning. Despite its benefits, joint life insurance is a niche product with limited availability from insurers, who may offer fewer options for term and permanent coverage.
First-to-die policies deliver a death benefit when the first insured individual dies, directly supporting the second individual with financial relief. But once the first-to-die policy pays out the death benefit, the surviving individual is left without any ongoing life insurance coverage, which makes considering additional insurance coverage essential.
It’s not all bad news, though. Surviving individuals benefit from temporary life insurance coverage for a period of 60 days following their partner’s death. This buffer period provides some relief, allowing the survivor to secure new insurance.
Second-to-die life insurance, which is also called ‘survivorship’ life insurance, pays out money after both people who are insured on the policy have passed away. This type of insurance helps with estate planning and wealth transfer. This type of insurance policy can provide an immediate source of cash to cover capital gains taxes or other liabilities.
If an Irrevocable Life Insurance Trust (ILIT) owns a second-to-die joint life insurance policy, the money from the policy goes directly to the trust when both people pass away. This helps to make sure that the benefit isn’t subject to estate taxes. This can provide immediate cash to the beneficiary, enabling them to pay estate taxes or other estate settlement costs without needing to sell valuable assets.
Your joint life insurance needs assessment should include your financial support requirements. Consider the impact of things like your debts (mortgage payments, loans) and daily living expenses, utility bills, and grocery costs. Other considerations include covering child care expenses or education costs.
Estimating income replacement is another key element to consider when assessing your joint life insurance needs. This involves considering the effects of losing one partner’s contributions like income or retirement savings.
Calculations for income replacement must account for the potential loss of a partner’s income while also making sure the surviving spouse keeps their standard of living and meets future financial obligations. This involves:
- Determining the duration of replacement needed
- Considering inflation’s impact on the surviving spouse’s living standard
- The income replacement method involves multiplying the insured spouse’s annual income by the number of years it will need to be replaced, adjusted for inflation and any other relevant financial factors.
Like any financial product, joint life insurance possesses its own set of advantages and disadvantages.
- Joint life insurance policies cover partners who might not qualify for individual policies due to health conditions.
- They're cost-effective and have a simpler application process compared to individual policies.
- This benefits couples struggling to afford two separate policies or individuals with health issues unable to secure individual coverage.
- Joint last-to-die policies can be less flexible than single life policies, with some insurers not allowing policy splitting.
- Managing joint policies in divorce can be challenging without a specified rider.
- After a first-to-die payout, the surviving individual may face higher costs due to increased age when buying new coverage.
Your joint life insurance policy should be flexible enough to adapt to any changes in life. Changes like divorce or separation can complicate joint life insurance policies, requiring adjustments to beneficiaries and potential conversion to individual policies.
- Divorce or separation can complicate joint life insurance policies, especially if there are no riders anticipating the dissolution.
- It might be necessary to convert a joint policy into two separate individual policies after divorce.
- The surviving member in a first-to-die policy may face higher insurance costs post-divorce due to age or health changes.
- Updating the beneficiary, as stipulated in the divorce agreement, may be necessary, possibly to a child or other family member.
Regularly reviewing your coverage is important to make sure your life insurance policy keeps up with your changing financial circumstances.
A good rule of thumb is to review your life insurance coverage once a year to make sure it’s sufficient and accurate to your needs.
- Joint life insurance provides a cost-effective solution for couples seeking financial security.
- There’s two types of joint policies - first-to-die and second-to-die, catering to different needs.
- While joint life insurance has several advantages, there are also disadvantages, especially when it comes to flexibility and potential complications during divorce.
- Assessing your needs and regularly reviewing with a financial or life insurance advisor are essential in keeping your joint life insurance plan up to date with your financial needs.