Joint First-to-Die Life Insurance

“Joint First-to-Die Life Insurance” is a guest post by insurance expert Glenn Cooke. Over the last two weeks, Glenn has helped clear up various misconceptions about permanent life insurance (Part I, Part II). He recently contributed to this book. Today he talks about joint first-to-die life insurance.

On a previous post about life insurance by Joe, a reader had commented that, while shopping for term life insurance, they’d discovered a cost savings – joint first-to-die life insurance. Rather than insuring two lives separately, they paid for a single death benefit and had enough savings to double their coverage! Joe responded and found this option intriguing.

This is a commonly-held belief, even for some folks in the life insurance industry. Like all things shrouded by mystery in the life insurance industry, I think it’s best if we actually put some real life numbers on it. So let’s see how joint first-to-die life insurance stacks up against two individual coverages.

Assumption 1: joint first-to-die life insurance is substantially cheaper than two individual coverages.

False.

The assumption of ’substantially cheaper’ is subjective of course, so let me provide an example. Let’s take a male and female (nonsmokers), both aged 40, seeking $500,000 of insurance.

For $500,000 of separate coverage (i.e. two coverages of $500K each), they’d pay $53.55.

For $500,000 of joint first-to-die life insurance they’d pay $48.33.

That’s a $5 difference. Fair enough: five bucks could buy a pizza on special. But it’s certainly not enough to get double the coverage as the original comment claimed. And, in my opinion, that’s not ‘substantial’. The reality is that joint first-to-die can be slightly less expensive than two individual coverages, but not by much.

Assumption 2: joint first-to-die is cheaper because it pays on the first death and then the policy is over.

False.

If you (or your broker) actually reads your life insurance policy, you’ll probably be surprised as to what it actually says.

Option 1: Both people die at the same time

Two individual coverages, two deaths: Two $500,000 death benefits paid, so total $1,000,000.

Joint first-to-die, what you may think happens: pays $500,000.

Joint first-to-die, what really happens: Pays two $500,000 death benefits, so total $1,000,000 – exactly the same as two individual coverages!

Proof: Here’s the text from a real Canadian life insurance policy (many companies have similiar wording):

“We will automatically provide term insurance on the life of the survivor from the date of the first death until the earlier of:

• the 31st day following the first death
• midnight of the day before the effective date of the new insurance.“

In other words, person one dies, the second person immediately and automatically has a new term policy which pays out if they die in 31 days (which we just assumed they did).

Option 2: One person dies, second person survives

Two individual coverages: One death benefit of $500,000 is paid out. Second person continues with their own coverage.

Joint first-to-die, what you may think happens: One death benefit of $500,000 is paid out. Second person has no coverage.

Joint first-to-die, what actually happens: One death benefit of $500,000 is paid out, second person can continue with their own coverage.

Proof: here’s the text from a real Canadian life insurance policy:

“If you have a first-to-die insurance coverage and one of the two insured people dies, you may buy new insurance on the life of the survivor, without providing evidence of insurability.”

In other words, the death benefits paid and availability of coverage is substantially the same in both cases. Specifically, joint first-to-die does not just pay one death benefit and then stop as you might expect. Two people die, two death benefits. One person dies, one death benefit and the second person can continue coverage of their own. In both cases, it’s just like two individual coverages.

But there’s still the $5 premium savings. And if the coverage is the same, then hey, $5 is $5.

Well, not so fast. It turns out that in practice there are some substantial potential drawbacks to joint first-to-die life insurance when compared to two individual coverages. If things go well you won’t see these drawbacks. It’s when things don’t go as planned that these drawbacks cause all manner of problems. Here’s the two main drawbacks to joint first-to-die life insurance:

1. Inability to split the policy. If you want to seperate the coverage of a joint first-to-die policy you may find that it’s simply not possible – you either both remain on as joint first-to-die, or you cancel. So why would you want to split the policy? The first and most obvious reason is divorce. When you’re spending your time trying to dissolve a marriage, having to cancel a policy and start a new one fresh is really bad time. Far easier to just sing a couple of papers, seperate your individual coverages into two distinct policies and you each take over your own insurance.
2. Not in the 50% of people that get divorced? What happens if you get to the end of the term and you’re ready to buy a new policy but one spouse has developed a medical condition and is thus now uninsurable? If you can’t split the policy, you’re both stuck hanging onto the old policy rather than having one person keep their coverage and the second person investigate new options.

There are other reasons why one might want to seperate coverages in the future and the inability of joint first-to-die policies to be split apart can prevent that from happening.

Specifically, your age-related benefits are based on someone older than you. When you buy a joint first-to-die life insurance policy the insurance company uses what’s called an ‘equivalent single age’. You and your spouse go through a formula that says you’re the same as a Male, Nonsmoker that’s older than you – and the policy is basically issued at that older age. So a male age 40 and a female age 40 might be equivalent to a male nonsmoker age 48. They then charge you the premiums for a male age 48 which saved us the $5 we saw above.

So what does the new, older age of 48 affect? Well, most term policies have an option called conversion. This option allows you to convert your term insurance to permanent life insurance without a medical exam. But this option expires, commonly at age 65. Except on a joint first-to-die policy where your equivalent age is 48, this option is now going to expire 8 years earlier – when you’re only 57. And because people tend to have more medical issues as we get older, losing that last 8 years of benefit is happening exactly when we’re more likely to use it.

There are other drawbacks to joint first-to-die life insurance, but in general these problems all arise in worst case scenarios. It’s when things go wrong that having two separate coverages is much preferable to having a joint first-to-die policy. And, in my opinion, those potentially catastrophic concerns are not worth a monthly pizza.

Glenn Cooke is president of Life Insurance Canada.com. He and his spouse have lots of life insurance. None of it is joint first-to-die. They do, however, own a joint last-to-die policy.