Joint Life Insurance As Alternative To Standard Life Insurance
The typical life insurance policy that most people are familiar with is written on the life of one individual. Although rarely referred to as such, this type of policy is technically called single-life insurance. It is important to understand that single-life life insurance is not the only way to go. Policies can be written on more than one individual, and base coverage on multiple lives. This type of policy is referred to as joint life insurance.
The way a typical joint life insurance policy works is that the contract is designed to cover two or more individuals. Technically, there is nothing restricting the number of lives that are covered under one policy, though few insurance companies will allow coverage of over 12. In fact, most companies will restrict their policies to three of four individuals.
The most common form of joint life insurance policies are referred to as first-to-die. The way this works is that the death benefit is paid out to the beneficiaries after the first death of those that are covered. This is most often found in some form of business related buy-sell agreement. The principles or owners of any particular business purchase a joint life policy, allowing them to "buy out" any owner's that pass away. The death benefit provides the cash to purchase the deceased owner's remaining business shares.
One of the most common gaps in business planning many small businesses face is regarding their buy-sell agreements (or lack thereof). The death of business partner often leaves the remaining owners in a delicate situation. Far too many spouses/children have no further interest in the business upon the original owner's passing. The remaining interest is often demanded in the form of cash, leaving the business in a difficult scenario. More than one business has collapsed as a result of having insufficient cash to buy out the remaining family's interest in the business.
Similar to these joint life insurance contracts are survivorship or second to die life insurance contracts. As opposed to the face amount being payable on the death of the first person on the policy to die, these policies continue until the "survivor" or last person passes away. Such policies are quite common in estate planning purposes, often allowing the individuals to maximize the estate tax exemptions between the two spouses.
Although the contract can come in the form of joint term life insurance, it is more commonly packages with whole or universal life. The reason the contract is not purchased as a term life insurance contract is that it is often cheaper to purchase separate term policies versus paying for a single joint policy.
How Much Will A Joint Life Insurance Policy Cost?
Your typical joint life insurance quotes are going to be more expensive than your standard single-life policy. Covering the lives of multiple individuals increases the cost to the insurance company. The quote will most often be cheaper than trying to purchase two policies with the same death benefit per person however. For example, two whole life insurance policies with a $100,000 death benefit each would likely cost more than a single joint-life insurance quote of $100,000 death benefit. It is important to note that the death benefit in a joint policy is the total paid out, and not representative of a quote for each beneficiary.
Other Considerations
When using a joint life insurance policy to fund a buy-sell agreement, you should make sure your contract has a couple of qualifications. The biggest problem with joint life is that once the first partner dies, the remaining partners are left without insurance. This becomes a bigger problem if the remaining partners are no longer insurable. To combat this problem, many policies will either offer an extended period of coverage beyond the first death, and/or provide the option to create a new contract without exclusions based on insurability.
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