If you’re a husband or wife looking for coverage on both partners sometimes the subject of joint first to die life insurance (JFTD) comes up as a cheaper alternative to purchasing an individual life insurance policy on both. And at first, this would seem like a viable option. However I do not normally recommend joint first as the way to go in these situations.
There’s a number of reasons for recommending two individual policies (or one policy, with individual coverage on both spouses). First, you’ll probably find that the difference in premiums is a lot less than you would expect. The reason for this is that the risks aren’t all that much different. The insurance company on a JFTD policy now has to look at the risk of when the earliest is that either one of two people will die instead of just one person. Clearly this is more likely to happen earlier when covering two people at the same time.
Think of it this way. How likely is it that one person will die tomorrow? Not likely. How likely is it out of a million people, that one of those million people will die tomorrow? Pretty good. So the more people we insure on the first to die basis, the greater the likelihood the insurance company will have to pay – and thus the higher the premiums.
Secondly, in the event of a divorce there is no effective way to seperate the life insurance policy with a JFTD. With two individual policies it’s almost as easy as changing your beneficiary.
Thirdly, because insurance companies use a ‘combined’ age calculation your renewal rates will be sky high. As you age, life insurance premiums don’t go up in a straight line, they increase in an upward sloping curve. So let’s say you’re both 30 years old, and the insurance company calculates your ‘combined’ age for the joint life insurance to be age 40. If the policy renews in 10 years, you’re going to be renewing at the rates of a 50 year old when in fact you’re both 40 – and as I noted, rates as you get older get higher, fast.
The same is true should you decide to convert your joint first to die term policy to a permanent policy in the future. Conversion is a feature of many term policies that allows you to convert to a permanent policy in the future. If you convert a JFTD policy in the future, you’ll being doing so at the older (and thus higher rates) age that the insurance company uses for your combined age.
In short, if you have two people you need to insure, JFTD is not likely to be the way to to if the intent is to save money. JFTD policies do have their uses, but those uses are dictated when the the financial need is primarily upon the first death, and not just when you’re trying to find the least expensive policy.
If you’re looking to cover two people, determine the proper type of insurance and amount, then shop it out amongst companies – that’s the right way to find the cheapest policy.