A first-to-die life insurance policy is a type of joint life insurance that pays out when the first named insured dies. These policies are typically purchased to pay a death benefit to the surviving spouse. They are an alternative to purchasing two separate single life policies on each spouse.
Key Takeaways:
- First-to-die life insurance is a joint life insurance product that pays a death benefit on the first death of either named insureds
- Joint life insurance policies are typically cheaper than purchasing two separate individual life insurance policies and simplify your finances
- Joint life insurance can be beneficial if one person has significantly worse health than the other
- Most joint life insurance policies come with optional riders that allow for splitting the policy
- First-to-die life insurance is typically purchased by spouses or business partners to help the surviving member’s finances
Understanding Joint Life Insurance
The most popular type of insurance is individual life insurance. These policies have one named insured and will pay out the death benefit when that person dies. You can purchase an individual life policy on yourself or on someone who you have an insurable interest.
However, there are times that two people have their financials entwined. This is typically spouses, but can include business partners as well.
The benefit of a joint life insurance policy is it is generally cheaper than getting two separate individual life insurance policies. Additionally, joint life policies simplify your finances as there is only one product to keep track of and make payments on.
There are 2 types of joint life insurance: 1) First-to-die and 2) Last Survivor.
First-to-die life insurance pays out on the death of the first named insured. When either named insured dies, the death benefit is paid. Typically the beneficiary of the policy is the other named insured.
Last survivor joint life pays when both insureds die and is also known as second-to-die life insurance. These policies are typically purchased to provide for beneficiaries like children, if both lives die.
What Is First-To-Die Life Insurance?
First-to-die is a type of joint life insurance that triggers a payout upon the death of the first named insured. Joint life insurance is a policy with 2 separate lives on it. When you purchase a joint life policy, you have to choose between first-to-die and last survivor joint life.
People will buy a first-to-die (FTD) joint life policy in place of purchasing 2 separate individual life policies.
The main reason people purchase a first-to-die policy is to cover the expenses if one spouse dies. In two family households that require both incomes to maintain the standard of living, a FTD policy is a convenient way to cover that expense. Most purchasers are in a family where both spouses earn a similar salary and there are fixed expenses, like a mortgage, that would need to be covered with one salary.
Buying a single FTD policy will typically be cheaper than purchasing 2 individual policies of similar sizes. For example, if you take out a mortgage for $250,000 it would be cheaper to get a single FTD joint like for $250,000 than buying two separate polices of $250,000 each.
Even if one spouse is the primary breadwinner, if the other spouse handles the majority of the child and home care, these are cost that would need to be covered. A FTD joint life policy can help cover childcare and home services to help the surviving spouse.
First-to-Die Joint Life Insurance vs Individual Life Insurance
Joint life insurance policies cover two people under one policy while an individual life insurance policy only covers one life. Most joint life policies are permanent life insurance. Permanent life insurance is typically 5 to 15 times more expensive than a similar sized term product.
Individual life insurance can be permanent insurance that covers you for life, but also term insurance that only covers you for a pre-specified amount of time.
Additionally, for joint life insurance both lives typically need to undergo full underwriting. Individual term insurance has the option of accelerated underwriting.
Is First-to-Die Life Insurance Right For You?
First-to-die life insurance can be a good fit for spouses who only want to provide for the surviving spouse if either of were to pass. Additionally, business partners who want to protect the business if one was to die can be a good fit for FTD joint life.
But if you are young, the cheapest option is term insurance. Buying term and investing the difference (BTID) and creating a term life insurance ladder is often the cheapest option for young newlyweds.
But if you are looking for a permanent cash value life policy, exploring joint life insurance is an economical choice.
Joint life insurance can be a useful tool as you are considering how your life insurance needs change throughout your life.
How to set up a joint life policy
When purchasing a joint life policy, you need to show the life insurance company that both insureds have shared assets. You generally can’t get a joint life policy on 2 unrelated people with no shared financial interests.
The insurance company will typically require underwriting on both insured lives. Under a full, traditional underwriting process, this would mean both lives would need to go through a medical exam.
One of the benefits of a joint life policy is if one person is very unhealthy, they may still qualify for a joint life policy. It is a way to get someone who normally would be denied coverage approved for life insurance. Someone in very bad health often can only qualify for final expense life insurance which an expensive option with low face amounts. However, the premiums on a joint life policy will depend on the health risks of both lives.
As you go through the application process, you will choose whether you want a first-to-die or second-to-die life product.
In the case where one life is significantly less healthy, first-to-die life insurance is often priced based on the worse of the 2 lives. This can make the policy expensive. Whereas a last survivor joint life policy will more reflect the health of the healthier life.
Can You Separate a First-to-Die policy?
Joint life insurance can be complicated in case of a divorce or separation from your business partner. Most joint life insurance policies offer a life insurance rider that allows for splitting the policy. A life insurance rider is a policy add-on that provides additional features or flexibility to the base policy.
When you split a joint life product, each of you will get an individual life policy with just one named insured. Some riders allow for both lives to elect up to the initial coverage amount (ie- a $500k joint life policy can be split into two separate $500k individual policies). Other riders will split the joint policy in half (ie- a $500k joint life policy is split to two $250k policies). And other riders allow for each insured to choose an amount up to the original coverage.
When you split a joint life insurance product, the overall premiums paid from the 2 separate policies will likely be higher than the single premium on the joint policy.
Lastly, each individual policy gets the opportunity to name a new beneficiary to get the death benefit when the person dies.
The Final Word
Joint life insurance is a product that fills a specific niche market primarily of spouses and business partners who want protection if one were to die. It can be an economical way to get coverage on 2 lives that lasts for a lifetime.
However, if you are young getting two term insurance products is often a cheaper alternative, especially if you are starting out and don’t have the income for a higher cost permanent policy.
Frequently Asked Questions (FAQs):
Joint life insurance is a single life insurance product that covers 2 separate lives. The first-to-die joint life insurance product pays out upon the death of the first of either insured. It is typically purchased to help the surviving partner pay for expenses after the death of the other.
Joint life insurance is typically purchased by two spouses or business partners. The 2 lives need to have a shared financial interest to get a joint policy. A last survivor joint life policy is typically purchased for the benefit of dependents when both policy holders die, while a first-to-die policy is for the surviving partner.
Both first-to-die (FTD) and last survivor (LS) life insurance are joint life products that insure two lives with one policy. When you apply for a joint life insurance product, you elect if you want a FTD or LS product. The primary difference is that a FTD policy pays out on the death of the first life and a LS policy pays out only after both insureds die.