Joint First to Die

One of the most frequent life insurance needs I run into is a young family who have just purchased a house. Both spouses need life insurance in case one of them dies. The benefit would be used to pay off the mortgage, provide some income for the survivor and maybe set up a trust fund for the kids. A Joint First to Die policy seems like the perfect fit. This type of policy is one contract on both of the spouse’s lives. The benefit is triggered by the death of the first spouse. Sounds simple enough right?

I have a few problems with Joint First to Die policies, some of which come from experience, others I hope never to experience. Every company words their policies differently and they all have certain... shall we say “quirks” that don’t make any darned sense. I feel I need to preface this entire article with “typically”, “most of the time”, “usually” because the way you think, want, or understand it should work isn’t always how it works. Observe.

Joint Disaster – No, not when the police seize your weed, but a scary way of saying both people insured die at the same time (car crash, plane crash, etc.). Typically to be considered a joint disaster both insured have to die within 30 days. They don’t have to die of the same event, just within the same 30 day window. The first to die of Jack and Jill is insured for $1 Million. If both insured die at the same time, some policies will pay out double, or $2 Million because each life was insured for $1 Million. Some other policies such as Great West Life do not pay a double benefit they will only pay out on the first death and then the contract ends. Don’t you think little Timmy and Tammy should get $2 Million if both their parents die? I do.

Well if the benefit is half it must be cheaper right? Wrong.
Joint policies tend to be a little bit cheaper; Manulife boasts their joint policies are 3% cheaper than two separate policies. True but misleading, every policy has a “policy fee” attached to it. The policy fee usually runs about $50 a year, it is just an administration charge it is not part of the insurance. Since Joint policies cover two people with only one policy you save on the fee, good deal right? Guess what? If I send in two applications at the same time, say for a husband and wife, I can ask the insurance company to waive one of the two policy fees, presto same price.

Separation/Divorce – While most of the clients I talk to are all happy loving couples who just bought their first home and love each other ever so much, the fact is that about half of them will divorce at some point. Splitting a joint policy is a pain in the butt. Divorces can be nasty, ugly, bitter affairs. I have seen cases where the policy is paid out of “that cheating bastards” bank account, so “the backstabbing bitch” won’t sign the papers to change the banking information because it costs “the asshole” money. Hilarity and lawyers ensue...

Aside from the actual paperwork to split the policy, how the policy is split can also be fraught with peril. Two lives, each insured for $1 Million depending on who dies first should be split into two policies worth $1 Million each right? Not necessarily. After the first death the policy usually ends, the insurance company would only have to pay out $1 Million, there is no way they are going to want to double the risk on their books. You each get $500,000, tough.

Joint First to Die policies have a lot of problems and a lot of uncertainty due to the myriad of rules, quirks and annoying little idiosyncrasies. Two individual policies avoid this entire headache, cost the same, are more portable and pay out as expected. Because of this I have stopped selling Joint First to Die policies entirely, you can simply do a better job with two policies instead of one. It means I have to do double the paperwork but it is well worth it for my clients.

EO&E