Joint Last-to-Die Life Insurance: How Does it Work?

Joint Last-to-Die Life Insurance

Married couples looking to insure their lives can buy two separate policies or one joint life insurance policy. The latter can be a better option for estate planning or when one of the partners has health issues. It is also a great choice for couples who want to save on insurance premiums.  

There are two types of joint life insurance: joint first-to-die and joint last-to-die. The first one pays the policy amount after one policyholder passes away, while the other pays after the death of both policyholders.

In this post, we will discuss how joint last-to-die life insurance works, so that you can decide if it is right joint life insurance policy for you and your spouse.

What is joint last-to-die life insurance?

Joint last-to-die life insurance covers the lives of two people but pays only once. The insurer issues the payout to the beneficiaries after the passing of the second spouse. Compared to two individual policies, a last-do-die plan is much cheaper.

After the death of one policyholder, the surviving spouse must continue paying the premiums to maintain coverage. Joint life insurance policies are generally permanent, but some insurers also offer term joint life insurance plans.

Permanent life insurance plans last for your entire lifetime. Which means the payout is guaranteed (provided you pay premiums).

If you buy a joint last-to-die permanent life policy, you can rest assured knowing your policy will pay out regardless of when you and your spouse pass away. Many permanent plans also build cash value. You can tap into your policy’s cash value any time by taking a loan against it, borrowing from it, or in other ways.  

Term life insurance, in contrast, does not build cash value and provides coverage for a pre-defined period. So, the payout is not guaranteed. If you buy a joint last-to-die term policy, your beneficiaries will receive the benefit amount only if both you and your spouse die within the policy term.

Let’s say a couple purchases a 10-year joint last-to-die plan. The insurer will not issue any benefit if only one of the partners dies. Also, the other policyholder must continue paying premiums to keep the policy in force. Their beneficiaries will receive the proceeds of the policy only if the second insured also passes away during the policy term.  

Joint term life policies usually have a term of 10 or 20 years. Other things being equal, term life is significantly cheaper than a permanent policy.

Most couples who purchase a joint-to-die plan name their children as beneficiaries, but this is not compulsory. You are free to name anyone as your beneficiary, and your beneficiary does not have to be a person. For instance, if there is a cause that is close to your heart —you can name a relevant charity or organization as your beneficiary. This will ensure your money will be put to good use after you both pass away.

A joint last-to-die policy can make sense when the surviving spouse has sufficient retirement savings and no major financial obligations. Because the death benefit is issued to the beneficiaries after both policyholders have passed away, it is not a suitable option if you want to provide income replacement for your surviving partner.

Joint last-to-die life insurance is a good option when:

• You cannot afford to buy two individual policies
• You or your partner has a health issue that makes it harder to qualify for a policy
• You want to leave an inheritance for your heirs
• You have a lifelong dependent
• Your policy’s cash value is part of your retirement plan
• You want to leave a bequest to a place of worship or a charity

Why get joint life insurance instead of an individual policy?

Individual and joint life insurance policies are two vastly different products, each with its own pros and cons. Which one is better for you depends on your situation and needs.

If any of the following statements holds true for you, a joint life insurance policy might be right for you.

You cannot afford or qualify for two separate policies

Joint life insurance is more affordable than buying two individual policies. That is because it covers two lives but pays out only once.

If your budget does not have room for two life insurance premiums, or if you or your spouse has a serious underlying health condition, joint life insurance can be an excellent option.

You want an affordable permanent life plan for estate planning

Permanent life insurance does not come with an expiry date, but it is rarely cheap. One way to cut down your cost is by buying a joint life insurance plan instead of two permanent policies. This makes financial sense when you want life insurance for estate planning purposes. Your beneficiaries can use the payout to cover estate taxes and other legal fees associated with estate settlement.

You live in British Columbia and want to defer property tax

The BC Tax Deferral Program allows homeowners aged 55 or older to defer their property tax indefinitely. You will be charged an interest rate of 1.95%. Since the interest does not compound, it is a huge advantage to you.

For example, you can buy a joint life policy with the money saved. When both of you pass on, the estate can clear the tax bill using the policy amount. And there is a great chance that your estate will still have sufficient money for your heirs after paying off the tax.

You want to provide for a disabled relative’s future

If you are taking care of a relative with a severe disability, you may need some life insurance to ensure there will be money to take care of their future. Since the money will only be needed when neither of you is around, a joint last-to-die policy is a suitable solution.

You want to donate money to a charity

If you deeply care about a charity and would like to leave a large donation, a last-to-die policy can make sense. You should also consider it if you would like to leave a legacy for your children or grandchildren.

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Advantages

Joint last-to-die life insurance offers the following advantages:

Estate Preservation

Most people take out a joint last-to-die policy for estate preservation purposes. The payout can help offset capital gain taxes, debts, or other expenses associated with an estate.

Lower Premiums

Compared to two separate policies, a joint last-to-die policy is usually significantly cheaper. In fact, many couples buy this financial product for this reason only.

Legacy for your children

A joint last-to-die policy is better suited when you want to leave a legacy for your children. However, if that is your aim, consider buying a permanent policy rather than a term plan. This way you can ensure your children will receive the policy proceeds, no matter what.

If you and your spouse take care of a relative with a disability, then also a joint last-to-die policy is a worthy option. The proceeds of your policy can help your relative maintain their living standard even after neither of you is around.

Disadvantages

While an excellent option in certain situations, the joint last-to-die insurance has certain drawbacks, such as:

Only one payout

The policy pays out only once, after the death of both the policyholders. If the loss of a partner will affect the surviving partner financially, this could be a problem. A work-around here is to take out a small first-to-die plan, which the surviving spouse can use to cover funeral and end-of-life medical expenses.

Not suitable for income replacement purposes

Most people buy life insurance to ensure their family will be able to live comfortably if something were to happen to them. However, since a join-to-die policy pays out only after the death of both policyholders, it is not suitable as income replacement for your partner.

The surviving spouse must continue paying premiums

Life does not always go as planned, and it is possible that your spouse might find it difficult to pay premiums after your death. If your partner cancels the policy, all the premiums paid so far would be wasted. A workaround here is to buy a plan that becomes fully paid up at the time of the death of the first policyholder. Such an arrangement will ensure the policy is not cancelled after the first death.

Joint plans are not easily divided when couples separate

Unfortunately, divorce and separations happen. Your decision to separate can greatly impact your joint life insurance. What happens to your policy after separation depends on its terms.

Some policies include a feature called separation benefit, which allows policyholders to divide their joint policy in the event of divorce or separation if certain conditions are met. Joint policies without a separation benefit, however, cannot be split.

If you and your partner have decided to separate, first check whether your joint policy has a separation benefit. If it has, also check the fine print since there is often a time and age limit.

Usually, you need to apply within six months of divorce or informal separation to avail this benefit. Some insures offer this benefit only to policyholders who are under a certain age — typically 55 years. Others, however, do not have an age limit.

What if you do not have the separation benefit?

If you have a permanent joint policy, you may consider cancelling it for its surrender cash value. Surrender cash value is equivalent to the cash value minus fees and penalties. By cancelling a permanent plan, you can get back some of the money paid into the policy.

Term life insurance policies, however, do not build cash value. So, when you cancel it, you will not receive a payout.

Alternately, one partner may decide to take over the joint policy. This may make sense if the policy was bought many years ago and you would receive much higher premiums now that you are older.

Conclusion

Joint last-to-die life insurance covers the lives of two people, generally partners. It pays out the policy amount upon the death of both policyholders.

A joint last-to-die is more affordable than two separate policies because it is likely to pay out farther in the future. Most couples buy this product for estate preservation purposes, although it is a smart option in several other situations.

For example, you may want to consider when you cannot afford two policies or when you or your partner has a serious underlying medical issue. A joint last-to-die plan is also a good choice for leaving a legacy for your heirs or large donation to a charity. Whatever you reason for buying a joint life policy, Dundas Life can help you find an affordable plan that meets all your financial needs.