Joint Life Insurance Guide: Best Policies for Couples

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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. 

Key Takeaways

  • Joint life insurance policies offer cost-efficient options, including first-to-die and second-to-die, useful for estate planning.
  • Benefits include affordability and coverage for partners who may not qualify individually, but they come with limited flexibility and potential challenges in case of divorce or a policyholder's death.
  • Downsides may include restrictions on changes to coverage and the possibility of coverage ending if the relationship ends.

Understanding Joint Life Insurance

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: 

  1. First-to-die 
  2. 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

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 Policies

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.

Tips For Assessing Your Joint Life Insurance Needs

Financial Support Requirements

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.

Income Replacement

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.

Pros & Cons of Joint Life Insurance

Like any financial product, joint life insurance possesses its own set of advantages and disadvantages. 

3 Advantages of Joint Life Insurance

  1. Joint life insurance policies cover partners who might not qualify for individual policies due to health conditions.
  2. They're cost-effective and have a simpler application process compared to individual policies.
  3. This benefits couples struggling to afford two separate policies or individuals with health issues unable to secure individual coverage.

3 Disadvantages of Joint Life Insurance

  1. Joint last-to-die policies can be less flexible than single life policies, with some insurers not allowing policy splitting.
  2. Managing joint policies in divorce can be challenging without a specified rider.
  3. After a first-to-die payout, the surviving individual may face higher costs due to increased age when buying new coverage.

A Note On Keeping Your Joint Life Insurance Updated

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 & Separation

  • 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.

Updating Coverage

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. 

Summary: Guide to Joint Life Insurance

  • 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. 

Frequently Asked Questions

What happens to a joint life insurance policy in the event of divorce or separation?

In the event of divorce or separation, the fate of a joint life insurance policy depends on the specific terms outlined in the divorce agreement or separation agreement. Typically, joint life insurance policies are dissolved or restructured to reflect the changed circumstances.

Options may include converting the joint policy into separate individual policies or transferring ownership to one of the former partners. It's crucial for divorcing or separating couples to review their life insurance policies and consult with legal and financial advisors to ensure that coverage adequately addresses their post-divorce needs and obligations.

Who can benefit from joint life insurance coverage in Canada?

Joint life insurance coverage in Canada is suitable for couples, including married couples, common-law partners, and same-sex couples, who wish to protect each other financially. It provides a single policy that covers both individuals, offering benefits upon the death of either partner.

Plus, joint life insurance can be advantageous for business partners or individuals with shared financial responsibilities who want to ensure financial protection for their co-owner in the event of death.

How does joint life insurance differ from individual life insurance policies?

Joint life insurance differs from individual life insurance policies in that it covers two individuals under a single policy, whereas individual policies cover only one person.

With joint life insurance, the death benefit is typically paid out upon the first death, after which the policy terminates. In contrast, individual life insurance policies provide coverage for one person and pay out the death benefit upon that person's death.

While joint life insurance may offer convenience and cost savings for couples, it's essential to consider factors like coverage amounts, beneficiaries, and policy terms when comparing it to individual policies.

Can couples of any age apply for joint life insurance in Canada?

Yes, couples of any age can apply for joint life insurance in Canada, provided they meet the insurer's eligibility requirements. Joint life insurance is available to couples regardless of their age, marital status, or health status.

Premiums for joint life insurance policies may vary based on factors like the age and health of the insured individuals. It's important for couples to evaluate their coverage needs and consult with a licensed insurance advisor to determine the most suitable policy for their circumstances.

What factors should couples consider when deciding on joint life insurance coverage?

When deciding on joint life insurance coverage, couples should consider factors like their financial obligations, future plans, and individual insurance needs. It's essential to assess each partner's income contribution, outstanding debts, and ongoing expenses to determine the appropriate coverage amount.

Additionally, couples should discuss their long-term financial goals and consider how life insurance can help protect their family's financial future. Other factors to consider include the health and age of each partner, and any existing insurance policies or coverage in place.

Consulting with a licensed insurance advisor can provide personalized guidance and help couples make informed decisions about their life insurance coverage.

Can non-married couples or business partners qualify for joint life insurance?

Yes, non-married couples or business partners can qualify for joint life insurance coverage in Canada. Joint life insurance is available to any two individuals who have an insurable interest in each other, regardless of their marital status or relationship. This includes common-law partners, same-sex couples, and business partners who wish to protect each other financially.

Joint life insurance provides a convenient and cost-effective way to ensure financial security for both individuals under a single policy. Couples should review their eligibility and coverage options with a licensed insurance advisor to find the most suitable joint life insurance policy for their needs.

What happens to the policy if one partner passes away?

If one partner passes away in a joint life insurance policy, the death benefit is typically paid out to the surviving partner or designated beneficiary. After the death benefit is paid, the policy usually terminates, as it was designed to provide coverage for both individuals.

Some policies may offer options to convert the policy into a new individual policy or provide a continuation of coverage for the surviving partner, depending on the policy terms and insurer's guidelines.

It's important for couples to review their policy terms and discuss their options with their insurance advisor to ensure that their coverage adequately meets their needs in the event of one partner's passing.