What You need to Know About Joint Life Insurance Policy
A joint life insurance policy is in most respects no different than any other life insurance policy. It can a term, whole or universal policy. If it’s a permanent policy its cash value can be of a fixed or variable nature. What makes a life insurance policy “joint” is that it has more than one insured.
Joint Life Target Market
Married couples are a primary target market of joint life insurance policies, although joint policyholders need not be spouses. It can also be used in business situations to cover members of a partnership.
The joint life insurance policy should not be confused with group life insurance, as it is underwritten in a similar manner as a traditional single-insured policy and pays only one death benefit for a given group. Group life policies are generally not underwritten on an individual basis and pay a death benefit whenever any member of the group dies while the policy is in force. In addition, joint life insurance can be used as one’s primary life insurance solution, while group life is intended mainly as an on-the-job benefit and a supplement to an existing personal life insurance plan.
Types of Joint Life Insurance Policies
The two man types of the joint life insurance policy are the traditional joint life policy, or “first to die,” and the survivorship, or “second to die” policies. The traditional joint life policy pays its death benefit upon the death of the first joint policy holder, while the survivorship policy pays only after all insureds on the policy die.
The traditional joint life insurance policy is designed to pay a death benefit to the surviving spouse or partner upon the death of the first insured. However, when the spouse or any subsequent partners die, there is no longer any death benefit. This option tends to work best for a married couple who wants to ensure the surviving spouse is taken care of but who are not interested in taking out two separate single-insured policies on themselves. In a business scenario the first to die option can be used in much the same way as a “key person” life insurance policy, but with the key person in question being one of a group of people rather than a specific individual.
The survivorship policy presents a mirror image of advantages and challenges. There is no benefit when the first insured dies, but when the last one dies the death benefit is paid. The survivorship option tends to appeal to those primarily interested in life insurance for estate planning purposes. Used in a trust and written with a couple’s children as beneficiaries, the death benefit on a survivorship policy can pass directly to the children upon the death of the second spouse without going through probate. The survivorship option can also be an effective means to continue a business after all the founding partners have passed away.
Underwriting of a Joint Policy
In most cases a joint policy is underwritten based on the average age of the proposed insureds. For example, if a 41-year-old husband takes out a joint life insurance policy with his 35-year-old wife, the policy will be underwritten based on the company’s premium table for age 38. This has the effect of the younger insured paying more than he or she probably would otherwise, but the older insured getting a discount. As with single-insured policies, joint life insurance policies may be issued at standard rates, rates “rated,” or surcharged, based on health issues, or issued on preferred rates if the proposed insureds as a group are in particularly good health.
Because of this average age rule, and the fact by definition underwriting can’t be tied down to one individual, underwriting requirements for joint life insurance policies are often more relaxed than for similar single-insured policies. Therefore a joint life insurance policy may be issued for an otherwise uninsurable individual provided the other proposed insureds are in good health.
Advantages of the Joint Life Insurance Policy
The primary advantage of a joint life insurance policy is that it effectively provides two or more policies in one. As such it can represent a significant cost savings over similar coverages utilizing single-insured policies. Spouses may find joint life insurance more appealing than taking out two separate policies, or insuring one spouse with a term rider on the other. This is especially true if the spouses make a roughly equal income.
The joint life insurance policy can also be a logical choice for using life insurance as a business succession vehicle, especially in cases where taking out multiple policies on multiple key personnel is neither feasible nor desirable. If a joint life insurance policy is taken out as a whole or universal policy, cash value accrues on the policy as it would for a similar single-insured policy.
Challenges With The Joint Life Insurance Policy
Over time many companies have found the joint life insurance policy is not as profitable for them as the more traditional single-insured policies and have dropped them from their product line. As a result the option can be more difficult to find. However, many of the major life insurance carriers offer joint life insurance in some form. Once issued, joint life insurance policies are often quite inflexible. Many companies will not allow a change in face value or premium, even if the changing needs of the insureds warrant it.
On a traditional first to die joint life insurance policy, no specific consideration is made for final expenses. As a result a surviving spouse may find much of the death benefit eaten up by such things as funeral expenses and probate costs for the deceased spouse before he or she can use the funds as originally intended. To address this, some insurance professionals recommend purchasing a whole life policy for each spouse specifically for final expenses.
Beneficiaries can be changed on a joint life insurance policy as they can with any other policy (assuming, of course, the beneficiaries weren’t made irrevocable), but as with any other policy decision after issuance consent from all insureds must first be secured. If the insureds have a falling out after policy issuance, making any changes at all can pose a problem.
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