No matter how old you are, it's never too early or too late to begin thinking about your life insurance options. After all, you never know what the future might bring, and waiting too long could leave you and your loved ones without adequate coverage. But the process of finding the right policy can be arduous if you’re not well-informed. As you do your research, you'll come across plans ranging from term and whole to individual and joint. To better understand which kind of policy best fits your needs, this guide discusses joint policies, which as its name implies covers two people instead of one.
Keep reading for information on joint life insurance, how it works and its pros and cons to see if it’s the ideal plan for you.
What is joint life insurance?
A joint life insurance policy is a single plan that covers the lives of two people through one premium, with the policyholders becoming each other's beneficiaries or passing the benefits to their heirs. Depending on the coverage selected, these types of life insurance plans pay out death benefits when one or both of the policyholders die.
This setup eliminates the need for separate policies for spouses or partners, minimizing paperwork, underwriting and administrative costs associated with life insurance policies. This type of plan is also beneficial for business partners who can use the death benefit to fund the company if one of them unexpectedly dies.
Joint life insurance plans are typically permanent policies that stay active as long as you continue paying the premiums or until the policy pays out. Investing in joint whole life insurance is beneficial because of the long-term certainty it provides. However, joint term life insurance options could be available through some insurers.
To better understand the differences, read our guide on term life insurance vs. whole life insurance.
How does a joint life insurance policy work?
Understanding how joint life insurance works will help you determine if this type of policy is right for you and your spouse or partner. There are two types of joint life insurance: first-to-die and second-to-die. The following section details each.
First-to-die life insurance
A first-to-die life insurance policy pays a death benefit to the surviving policyholder when the other party dies. This type of joint life insurance ensures the living policyholder receives a payout, which can help pay for funeral expenses or costs of living if the family's primary income source is the first to die.
Alternatively, situations in which one spouse doesn't qualify for life insurance could also direct you toward first-to-die insurance. In this scenario, insurance companies could be more willing to insure those experiencing pre-existing health conditions because there's only one payout between the two policyholders. However, the healthier spouse will likely incur greater life insurance expenses (e.g., plan premiums) through this joint policy than they would with an individual plan.
It’s important to understand that first-to-die joint policies terminate once the payout occurs, which could leave the surviving spouse or partner without life insurance if they don’t have a supplemental plan. In those instances, the surviving party could then look for individual policies for estate planning purposes or to ensure their beneficiaries receive a death benefit.
Second-to-die life insurance
Also known as survivorship life insurance, second-to-die life insurance policies don't pay out until both policyholders die. These types of plans are typically used as a means of leaving money behind for beneficiaries or to pay for funeral expenses. A second-to-die policy can also help with estate planning because heirs don't pay estate tax on the death benefits unless they exceed estate tax thresholds.
The choice between first-to-die and second-to-die policies will depend on how your family intends to use your joint life insurance benefits. Sitting down with your partner to figure out the ideal course of action will help you determine the best life insurance to meet your needs.
The pros and cons of joint life insurance policies
As you compare joint life insurance policies with individual policies, you'll see some clear pros and cons among them. Understanding how these policies will work for you and where they might fall short can provide a clearer idea of which is the best fit.
- Cost-effectiveness of joint life policies
- Useful for estate planning and preserving wealth
- Limited flexibility in individual coverages
- Tax implications and estate taxes
Joint life insurance pros
Investing in a joint life insurance policy might make sense because of its benefits. These plans streamline the life insurance process because they require less paperwork when covering both you and your spouse or partner. The best joint life insurance policy for you depends on various factors, but the following section describes the benefits of these plans.
Cost-effectiveness of joint life policies
You could save money by opting for a joint life insurance plan rather than seeking out separate policies because the policy only pays out once and covers two people. Consequently, there's less risk for the insurance company, which typically translates to lower premiums for the policyholders. However, there are exceptions to this rule. For instance, if one spouse has significant medical issues and doesn't qualify for an individual plan, the joint policy could be costly.
Furthermore, the type of joint life insurance you opt for could also influence your premiums. Joint term life will cost less than joint whole life, as the coverage could expire before the death of either policyholder. Going through a complete comparison and gathering some joint life insurance quotes can guide you in the right direction as you determine the best option to meet your needs.
Useful for estate planning and preserving wealth
Using joint life insurance to preserve wealth for your beneficiaries can work wonders. First, the death benefits are tax-free if you name a beneficiary, giving the inheritor(s) one less thing to worry about when you die. Additionally, your heirs can use these death benefits to cover funeral costs, which could be vital since it will take some time for the money from your estate to reach them.
Your joint life insurance policy could also save your business if you or your business partner die unexpectedly. If you run a business with another person and are taking on significant debt during the startup phase, the company would likely be in trouble if one person can no longer contribute. Along the same lines, joint life insurance protects you and your partner from imminent financial distress after a sudden death. In this scenario, you could name your business partner or the business itself as the beneficiary and use your death benefit to cover company expenses.
Joint life insurance cons
Like any insurance coverage, joint life insurance isn't without its imperfections. This type of coverage has some drawbacks you should be aware of before progressing with a policy. The following section details the most significant downsides of these policies:
Limited flexibility in individual coverages
While prospective buyers might be drawn to the convenience of a joint life insurance policy, they aren't as flexible as individual plans. Because the policy applies to two people, both individuals must meet the coverage requirements before an insurer will approve the policy. As a result, there's a chance policyholders could end up with significant premiums if their spouse or partner is currently dealing with health issues or has pre-existing conditions.
Additionally, you and your spouse or partner must agree on the coverage needed, who the beneficiaries will be and how long the policy will last. Finding common ground in these scenarios could be problematic. For example, in situations where both prospective policyholders have children from previous relationships, there could be issues in who should be designated a beneficiary and what portion of the death benefit they’ll be entitled to.
A joint plan might work if you and your spouse or partner are in agreement about the beneficiaries and coverage for your life insurance. However, individual plans could be the better option if you have different coverage needs or expectations for heirs.
Tax implications and estate taxes
Death benefit proceeds received by beneficiaries of life insurance policies aren’t considered income, don’t have to be reported to the IRS and are therefore considered tax-exempt. However, there are scenarios where a joint life insurance policy could have tax implications for your heirs.
This can occur if you don't name a beneficiary for your death benefit and the funds become part of your estate. When this occurs, your heirs must pay estate tax on your assets if the inheritance exceeds the 2023 federal threshold of $12.92 million for individuals or $25.84 million for couples. In numerous states, there are also estate tax implications, with Massachusetts and Oregon having the lowest estate tax thresholds at just $1 million.
It's essential to carefully weigh the pros and cons of joint life insurance to determine if it’s right for your family. Whether the subject is familiar or this feels like a life insurance for beginners crash course, it's always a good idea to consult with an insurance professional who can guide you toward the best policy to meet your needs.
Joint life insurance FAQs
Is joint life insurance cheaper than single?
What is the best joint life insurance policy?
Can you have a joint life insurance policy if you're not married?
What happens to joint life insurance after divorce?
Is it better to get single or joint life insurance?
Summary of Money's guide to what joint life insurance is and how it works
Joint life insurance provides a policy that protects two people instead of one, making it a strong option that couples and business partners can consider. These policies reduce paperwork, require less underwriting and streamline the insurance-finding process, potentially saving the insured money. However, some couples or partners are better off with individual policies because of the flexibility and coverage options they provide. The life insurance coverage you select is a personal decision based on what insurance companies make available to you. Review your options and compare quotes to ensure your policy protects you and your family as much as possible.