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Joint Life Insurance Coverage

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When meeting young couples for the first time, I commonly find some who have purchased a joint life insurance policy (first to die) because of the perceived saving over combined coverage. They were not told that for a little more money they could have double the coverage by insuring themselves individually.

Compare a $1 million joint first-to-die, 10-year term policy for a 30-year-old couple vs. insuring themselves individually through a combined policy. Individual coverage would cost about $62 more annually, but they would have $2 million worth of coverage between them. It’s not hard to see that’s significantly better value for their premium dollars.

A big problem with first-to-die coverage is that it pays out on the first death, but the policy terminates, leaving the surviving spouse without coverage. With combined coverage, the surviving spouse would still have coverage, at a reduced premium.

It’s also important to be aware that other complications can arise with joint policies. Divorce does not invalidate a contract, so if someone forgets to change their beneficiaries, their ex-partner could receive an unintended death benefit. Also after a divorce, each individual may now have to purchase new insurance, which may be costly or even impossible if health has worsened. On the other hand, combined policies are relatively easy to split, and no underwriting is involved.

Joint policies insure two lives on one contract and are underwritten by combining the health and ages of each life. The premium is determined by the average longevity of the two spouses. Some companies offer a combined joint policy offering two individual coverages in one policy with one policy fee, offering discounts over two individual plans.

Joint life first-to-die policies pay out when the first insured dies, the coverage ends and the survivor no longer has any coverage. These are generally sold to cover a specific personal or business debt. I am not a big fan of these, because for a little extra money, people can be insured individually for twice the coverage. Most creditor life insurance plans are this type, so that’s another reason that individually owned combined insurance is better when covering a loan, mortgage or line of credit.

Joint life last-to-die policies pay out after the second death. These are relatively inexpensive and can work well for people wanting to leave money to heirs, cover taxes after death for estate conservation, or to help equalize an estate between children.

When an insured child reaches adulthood, the family should discuss when the child should take over the premiums based on financial ability. If a child marries, the beneficiary should usually be changed to the new spouse. A life insurance policy can be rolled tax-free from a parent to a child`. An uninsured spouse should also purchase coverage even if she is a stay-at-home mom, since there will be new childcare costs if she were to die unexpectedly. If permanent coverage is unaffordable, they can purchase term and convert it when their finances are healthier without any future underwriting.

Take the time to sit down with a licensed financial advisor to determine the insurance coverage that is best for you and your family.
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