joint first to die life insurance Canada
Joint first to die life insurance, a type of term life insurance, is a life insurance policy that covers two individuals but pays only on the first death. At that time the policy automatically expires and coverage ceases.
This may seem like a good idea for family life insurance situations i.e husband and wife, but in practice there are some drawbacks as well as some better alternatives.
Contrast to Second insured/spousal discounts
A more typical life insurance policy for a husband and wife would in fact be two individual coverages in one policy. This life insurance policy setup is effectively two individual policies in terms of coverage, but printed into one policy. Attaching the two policies like this means there’s only one premium payment, and many companies offer a discount for combining two coverages like this.
Our recommendation is for those looking to insure two spouses, that you consider a policy with two coverages and a second person discount like this, rather than a joint first to die policy. It may seem like a joint first to die policy would have pretty much the same coverage, but at a cheaper premium, so all upside and no downside. But as always, the devil’s in the details. Before I explain the downsides, let me explain the similarities between spousal discount policies and joint first to die.
Death benefits – similarities to spousal discount policies
Spousal discount policies have two separate coverages. If one person passes, it pays a death benefit and the second person’s coverage continues on, and will pay out when the second person passes. And if both people pass at the same time, it pays out both coverages. So effectively two death benefits.
You’d expect that a joint first to die policy would only pay out on the first person’s death – and that does happen. But many joint first to die policies today have a provision to pay out two death benefits if both people pass at the same time – just like a spousal discount policy.
Many joint first to die policies today also have a provision that allows the second person to obtain a new policy at the time of the first person’s passing, without any medical evidence. So if the first person passes, the second person can still have coverage, just like spousal discount policies.
Premiums – similarities to spousal discount policies
Since joint first to die policies have remarkably similar death benefit options to spousal discount policies it turns out that the premiums are also very similar. Here’s an example:
1. Joint first to die premiums: $71.60/month
2. Spousal discount policy premiums: $75.16/month
So a difference of $3.56/month. Well, if the death benefit coverage is the same, why wouldn’t you save $3.56/month? Same thing, cheaper price right?
Well, things are not the same. There’s a number of drawbacks to joint first to die life insurance that make the very small savings not worthwhile. Here’s a list of hidden drawbacks to joint first to die policies.
Inability to split coverage in the event of a marital breakdown
With a joint first to die policy, there’s no ability to separate the coverages. This is a big problem in the event of a marital breakdown because nobody wants to be in a life insurance policy with their ex-spouse, nobody wants to be required to qualify for a new policy at that time, and it’s not uncommon for spouses to become uncommunicative – meaning your existing joint first to die policy simply lapses.
Conversely, with the two individual coverages in a spousal discount policy it’s an easy process to separate the two coverages into individual policies while maintaining the existing term and premiums. That allows both people to simply separate their coverage and carry on without any further interaction with their former spouse.
Inability to split coverage in the event of one person becoming uninsurable
If one person becomes uninsurable, you’ll likely want to convert their coverage to permanent life insurance to lock in their insurability for life. With a joint first to die policy, you have to convert both people to a new policy. With the separate coverages of a spousal discount policy we can split the coverages into individual policies, convert just the policy covering the uninsurable spouse, and leave the remaining spouse with their existing term policy.
Loss of benefits earlier
Joint first to die policies are priced based on an ‘equivalent single age’ which can cause you to lose policy benefits earlier than other coverage options. The companies basically take two people together and say they’re the same risk as a single person of a different age. As you’d expect, the equivalent single age is older than the ages of the two insured people.
For example, a male age 40 and a female aged 40 may have an equivalent single age of 47. That means a joint first to die policy on these two people is based on a 47 year old (even though they’re both age 40). Which is fine – that dictates the premiums that we saw above. But, the older age 47 also dictates policy benefits that are based on age (like conversion and renewal premiums). So if a policy benefit expires at age 60, a spousal discount policy will maintain that policy benefit for a full twenty years for the two people aged 40. But a joint first to die policy will lose that benefit in only 13 years because it’s assuming an age of 47, not 40.
And since many policy benefits become more important the older we get, this loss of benefits in the last 7 years of a policy can be a substantial even catastrophic drawback.
Both people must have the same coverage
With joint first to die policies, both people have to be covered for the same amount. With a spousal discount policy there’s no limitation on the amounts of coverages. You could purchase $1MM on one spouse, and $500k on the second spouse.
Is joint first to die life insurance worth it?
Given the substantial potential drawbacks of joint first to die including inability to separate the coverages, potential loss of benefits, and inability to have different coverages, we recommend that a joint first to die policy is not worth the surprisingly small difference in premiums (recall in the example above, the savings was about $3.50/month on a $75/month premium).
Conversely, with the two individual coverages in a spousal discount policy it’s an easy process to separate the two coverages into individual policies while maintaining the existing term and premiums. That allows both people to simply separate their coverage and carry on without any further interaction with their former spouse.