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Joint First to Die Life Insurance

 Joint first to die life insurance insures two people, and pays only on the first death. Is this a good idea? It turns out that in Canada, the answer is generally, no.

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 If you’re looking for life insurance for your family, say two spouses, then you may think you only need life insurance when the first person passes away. And since there’s only one death benefit, hey, should be cheaper, right? Well, again, it turns out the answer is again, not really.

First, some history

 Joint life insurance pays on the first person’s death – which means there’s an increased probablity of paying a death claim earlier (since there’s now two people who can die earlier instead of one). So a joint first to die life insurance policy will naturally be more expensive than a single insured.

 But what about a joint first to die vs two individual policies? Well, it turns out that generally, joint first to die is only 5% cheaper or less, than two individual policies. Why? That’s where the history comes in. Over the years companies have tried to become more competitive with joint first to die life insurance. A long time ago, companies introduced a benefit on joint first to die policies, where if the first person passes away and the second person passes away at the same time, then two death benefits are paid. And another benefit is also common on these policies where if the first person passes and the second person survives, then the second person can automatically, without a medical, get their own new individual policy at that time.

 That’s pretty much the same as two individual policies. Both the Joint First to Die and two individual policies pay a death benefit if one person passes. Both pay two death benefits if both pass at the same time. And both pay one death benefit and allow the second person to still have a policy if one person passes and the other survives. Thus from an insurance perspective, they’re close (but not exact, more on that in a second), and thus the premiums are going to be close. Again, you should expect that a Joint first to die policy is 5% or less than the price of two individual policies.

 So if the insurance is ‘close enough’, why not save the 5%? If it’s even $1 cheaper, makes sense? Well, there’s some problems with joint first to die, and it’s our opinion that these deficiencies are not worth the very minor savings.  

 Why individual policies are better than joint first to die:

  • Inability to specify individual beneficiaries by coverage. This means that with two individual policies, you can specify one set of beneficiaries for the first coverage, and a second set of beneficiaries for the second person.
  • Inability to seperate the coverages. If you ever need to seperate the coverages, it’s virtually impossible to do (and may actually be impossible) with a joint first to die policy. Why would you need to seperate the coverages? There’s two common reasons. First, is divorce. Yes, it happens to about 50% of marriages in Canada. And nobody wants to be on a life insurance policy with their ex-spouse. Which means you’re looking at qualifying medically for a new policy in the future, if you can, and paying higher premiums because you’re older. With two individual policies, you simply take your existing coverages and go your seperate ways. Secondly, term policies have a couple of air bag features – an important one being conversion. If you become uninsurable, conversion lets you switch from term life insurance to permanent, without any medical requirements; it’s guaranteed. If you have a joint first to die term policy and one of you becomes uninsurable and thus you want to convert, you have to convert BOTH people (since it’s joint). Which will be more expensive for both of you. If you have two individual coverages, you can simply convert the one policy to permanent,and the other person can continue with their term coverage.
  • You lose your conversion option earlier. Conversion is available, but expires at a company-defined age. Lets use a constructed example, and say conversion expires at age 65. You’re both 50, so with individual coverages, you have this option available to you for 15 years. However, joint first to die policies don’t have ‘two people aged 50’. They use what’s called an ‘equivalent single age’ for the policy, and it’ll be older than both of you. So for two 50 year olds, the equivalent single age on a joint life policy may be age 55. Remember conversion expires at age 65 in this example? Your joint life policy only has conversion available for 10 years, instead of 15. No big deal? Perhaps – but when are you most likely to want conversion? The older you get, the more likely you are to become uninsurable and want this option – which is why having conversion for 15 years instead of 10 is so important. It’s exactly in those last 5 years when you’re most likely to want conversion. So with a joint life policy you may lose this option right when you need it and want it.
  •  Inability to have different coverages. With two individual policies, you can pick and choose individual coverage amounts. With a joint policy, you’re both insured for the same amount. If you need different coverage amounts, you can’t do so with a joint first to die policy. Further, if you decide that one person needs less coverage in the future, so you want to reduce their coverage (and save costs), you have to reduce coverage on BOTH people. The ability to tweak individual coverages is an important distinction with two individual coverages over a joint first to die policy.

 All of these deficiencies are things you may not care about most of the time – hey, you saved 5% or less. But if you run into a situation where these above deficiencies come about, then you’ll be very happy to have two individual policies – it’ll have been worth way more than the small amount saved over the joint first to die.

 All of that together – the fairly inconsequential savings, and the serious drawbacks when things go wrong, are why we don’t recommend joint first to die policies and instead suggest two individual coverages.

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