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Coverage for two: Joint life insurance

Mary Lou Jay

The purchase of individual life insurance is at a 50-year low, according to a 2010 report from LIMRA, an association of life insurance and financial service companies. But the need is there: Seven in 10 U.S. households say that they would have trouble meeting expenses if a primary wage earner died.

The LIMRA report says that some Americans are putting off life insurance to meet other financial priorities. Another reason may be the cost. In families with two wage earners, buying individual policies for each could stretch the budget too far.

A joint life insurance policy might help reduce premium costs while providing financial security. Joint life insurance covers two people, most often a couple or business partners. The cost is usually less than that of two individual life insurance policies, especially if one of the policy holders is young or in excellent health.

Joint life insurance policies can be whole life or term. There are two types: “first-to-die” and “second-to-die.”

First-to-die life insurance

Under the terms of first-to-die life insurance, the insurer would pay the benefit when the first person insured under that policy dies. That would provide the surviving spouse with a lump sum to cover expenses or make long-term investments. The surviving spouse no longer would have coverage under that policy once the payout was made.

A first-to-die policy may be suitable for a couple with children who are under 18 or still in college. If both spouses contribute to household costs, the death of one could seriously harm the family’s ability to pay bills, let alone save for their children’s educations.

In a business situation, the payout from a first-to-die policy could provide a company with much-needed cash to continue operations when one partner dies.

First-to-die coverage can be added as a rider to an existing policy. For example, a first-to-die rider can be added to an existing Farmers life insurance policy, allowing two people to be insured at a reduced rate. The rider can be separated out into a stand-alone life insurance policy at any time, Farmers says.

Second-to-die life insurance

Second-to-die joint life insurance policies (also called survivorship policies) are designed for a different scenario and pay their benefits when the second insured person dies. They’re most often used for small businesses, when survivors need to protect personal or company assets from inheritance taxes. A survivorship policy from New York Life, for example, is marketed toward family businesses.

Suppose a woman ran a successful business and passed her stake in the company to her husband when she died. No inheritance taxes would be due at that point. But when the widower dies, his children (or other heirs) might be forced to sell the business or liquidate some of its assets to pay the tax bill. The proceeds from a second-to-die life insurance policy would give those heirs the necessary cash to pay those taxes.

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