What Is Joint First-To-Die Life Insurance?
Fee-for-service financial planner and founder of PlanEasy.ca
What is joint first-to-die life insurance and why would you choose it over two regular life insurance policies?
Life insurance is meant to protect against an unexpected death. It’s meant to provide financial protection for those who may be dependent on the insured. This is very common for families with young children and also for households with dual incomes (especially when one income is larger than the other).
There are many types of life insurance but one of the most common types for the average Canadian family is called term life insurance.
Term life insurance covers the insured person for a specific length of time (the term). It’s typically less expensive than other types of life insurance because it only lasts for 10, 15, 20, 25 years. The cost of term life insurance is very low when purchased early. A young family in their late 20’s or early 30’s will pay very little for term life insurance because the probability of an unexpected death is very low.
Joint first-to-die is one form of term life insurance that is available to couples. A joint first-to-die insurance policy pays out when the first person in a couple passes away. Instead of having two term life insurance policies for $500,000 each, a couple could purchase a joint first-to-die policy that covers both for $500,000. A joint first-to-die term life insurance policy is typically less expensive than two similar but separate policies, so it can be attractive in certain situations. But what are the downsides of a joint first-to-die life insurance policy? And when might you choose a joint first-to-die policy over two separate policies?
Note: This post is for educational purposes only. Please speak with an independent insurance broker about your specific life insurance needs.
What Is Joint First-To-Die Life Insurance?
What is joint first-to-die life insurance? When a couple purchases a joint first-to-die life insurance policy they’re protecting against the first unexpected death only. A joint first-to-die policy will pay if either person were to pass away during the term. But it only pays on the first death.
For couples, this is often the main risk they’re trying to protect against, so a joint first-to-die life insurance policy can be a perfect fit. They’re trying to ensure that their existing lifestyle, home, financial goals etc are not severely impacted if one person were to pass away unexpectedly, and a joint first-to-die policy does this at a very reasonable cost.
The Benefits Of Joint First-To-Die Life Insurance
One of the largest benefits of joint first-to-die life insurance is that it’s less expensive versus two policies of similar size.
This makes sense because with a joint first-to-die life insurance policy the insurance company will only pay out once. If there were two independent policies, the insurance company may need to pay twice. That’s more risk/cost for the insurance company when there are two policies.
For example, with $500,000 in coverage, this could be the difference between a $500,000 payout with a joint first-to-die policy and $1,000,000 payout with two single life insurance policies.
At the same time, there are two lives insured by a joint first-to-die life insurance policy rather than one, for the life insurance company this increases the risk/cost slightly.
Still, the net risk for the life insurance company is lower with a joint first-to-die life insurance policy so the cost is often less, around 2/3rds of the cost of two similar single life policies (although this varies from company to company).
The Downsides Of Joint First-To-Die Life Insurance
It might seem like joint first-to-die life insurance is the way to go, but there are downsides to this type of policy to consider. There are a number of reasons that a joint first-to-die policy wouldn’t be appropriate. Here are a few things to consider…
1. Different levels of coverage are required: For many couples there will be different levels of coverage required. Perhaps income levels are different, perhaps one partner has generous employer coverage while the other does not etc. etc. If one person needs $250,000 of coverage and the other person needs $1,000,000 then a joint policy wouldn’t properly cover both.
2. Not as flexible: A joint first-to-die policy is not as flexible, especially if a family situation changes in the future due to a divorce, second marriage etc.
3. Survivor is left uninsured: In the event of an unexpected death the insurance pays out and the policy ends, but that leaves the survivor uninsured. Depending on their age and health factors, it may be difficult or expensive to find new insurance if coverage is still required.
Joint First-To-Die Life Insurance
Protecting against a large catastrophic risk is an important part of any financial plan. Whether or not a joint first-to-die life insurance policy is appropriate in your situation will depend on your specific needs.
It can be a great life insurance solution for many couples who need to protect against an unexpected death. It can be less expensive than two similar sized policies but there are also downsides to consider as well.
It’s important to speak with an independent insurance broker regarding your insurance needs, but certainly for couples, a joint first-to-die life insurance policy should be part of that discussion. In some cases, it can provide the perfect level of coverage at a very reasonable monthly cost.
Financial planner, personal finance geek and founder of PlanEasy.