What is Joint Life Insurance?
Joint Life Cover is typically designed for couples who have a shared liability together, such as a mortgage. It’s there to protect both individuals and pay out should one of you pass away, with the surviving partner using the payout to clear the mortgage. Joint life insurance.
Even where there is no mortgage, Joint Life Insurance can protect against a situation where one half of the couple would struggle to survive financially without the input of the other were the worst to happen.
As with individual policies you have many factors to consider when structuring a joint plan, including whether to choose Level Life Insurance or Decreasing Life Insurance and if you want to add Critical Illness Cover.
Do We Need Joint Life Insurance?
How would your partner and family cope if you were to pass away?
Could they survive without your income and keep up with all the bills and other household expenditure including, perhaps most importantly, the mortgage?
These days many households have two people earning a wage and contributing to the household finances, which means the loss of one of these incomes could prove financially disastrous.
This could especially be the case if you have a joint mortgage and the surviving partner would struggle to continue to meet the monthly mortgage repayments on their own.
Even where one half of the couple doesn’t work and instead stays home to take care of children, for instance, you would need to ask yourself how the surviving, working partner would cope with running a household and raising children as well as continuing to bring in an income.
Joint Life Insurance pays out a cash lump sum to a surviving partner so that liabilities such as a mortgage can be repaid and the family can continue to meet other vital living expenses. Where one partner stays at home to look after children, the benefit could be used to cover childcare expenses should anything happen to them so the surviving partner can continue working.
What Does a Joint Life Plan Cover?
Joint Life Insurance covers a two individuals under a single policy, paying out a cash lump sum should either party pass away. You agree on the sum assured with your insurer beforehand, typically carefully aligning this with your mortgage, other liabilities or general income needs.
Level or Decreasing Term Joint Life Insurance?
Broadly speaking, the two most common types of Life Insurance on the market are:
Level Life Insurance sees the benefit remain fixed over the life of the policy. There’s the potential to link this to inflation, so your cover won’t ever be eroded in real terms over the length of the plan. It’s most commonly used for family protection purposes over and above the mortgage to ensure there’ll always be a fixed lump sum to help your family should the worst happen.
Given the benefit remains fixed over the life of the policy, these policies are also used to cover interest-only mortgages, where the overall outstanding liability doesn’t fall with time.
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Decreasing Term Life Insurance, on the other hand, sees the benefit fall over the policy’s term. As the benefit you’ll receive goes down across the life of the policy, this is a cheaper form of Life Insurance. It’s most commonly used to cover a repayment mortgage, where the outstanding liability falls over time.
Family Income Benefit
Family Income Benefit is an alternative form of life insurance where the benefit payments are spread out into monthly or annual payments should a claim arise rather than providing a single lump sum.
Each month for the rest of the policy term, the beneficiaries receive an amount you agreed upon with your insurer so they can keep up with their daily living expenses without your income. The benefit is most often used to pay for bills, housing costs, groceries, school fees and any other everyday expenses your family would need to meet without you.
Joint Whole of Life Cover
Unlike Joint Term Insurance, Joint Whole of Life Cover is designed to protect individuals for their whole lives rather than just a set term, as long as you keep paying the premiums.
Given that it lasts for your entire life, it’s typically used to cover an expense that will definitely occur on your death, such as paying for a funeral or meeting an inheritance tax bill.
Joint Critical Illness Cover and Life Insurance
As with an individual policy you add Critical Illness Cover to Joint Life Insurance to protect against the risk of you suffering a serious illness such as cancer, a heart attack or a stroke.
Naturally the risk of suffering a serious illness is considerably higher than passing away. As a result, adding on Joint Critical Illness Insurance to your life plan will increase your premium.
Many couples opt to include critical illness for peace of mind, knowing if either party were to suffer a serious illness there would be adequate funds to pay off the mortgage, make alterations within the home to accommodate the change in health or meet any other expenses associated with their illness.
Single or Joint Life Insurance?
The most common scenario in which individuals opt for a Joint Life Insurance policy is to cover a joint mortgage.
If there are two individuals named on the mortgage contributing to the monthly repayments it is wise to protect both parties. Where there is only a single loan we only need the insurance to pay out on the death of one partner, as that death would trigger the objective of paying a benefit to repay the mortgage.
However, although a joint policy keeps the paperwork simple it can be more cost-effective to opt for two individual policies in certain circumstances.
Joint Life First Death or Joint Life Second Death?
There are two ways in which Joint Life Insurance will pay out:
On a joint life, first death basis
On a joint life, second death basis.
By far the most common is joint life, first death. These are used for most Joint Mortgage Life Insurance policies as the payout occurs on the death of the first partner and therefore repays the liability.
Far less common are joint life, second death policies. These are perhaps most used for joint Whole of Life Insurance policies to cover inheritance tax, for instance, where the liability will only arise on the death of the second individual. (This assumes that, on the death of the first individual, everything passes to a spouse and is therefore typically exempt from inheritance tax.)
Do I Need to Write Joint Life Insurance into Trust?
When you pass away, everything that you own is added together to form what’s known as your ‘estate’. If your estate is above a set threshold you may have to pay inheritance tax at 40% on the value of any assets above this threshold.
Life Insurance payouts are included in the valuation of your estate when you pass away, meaning that even a fairly modest Life Insurance policy could easily, when added to the rest of your assets, tip you over the inheritance tax threshold.
For this reason, people sometimes prefer to write their Life Insurance into trust, which pays out the benefit into a separate legal entity outside of your estate for inheritance tax purpose, bypassing inheritance tax on the payout.
Fortunately, however, with Joint Life Insurance the payout is typically paid straight to a surviving spouse. This eliminates the concern of inheritance tax on the benefit because transfers at death between spouses are tax-exempt. That means there’s usually less need to write the policy into trust than for a single Life Insurance policy.
If, however, you’re not married or you both were to die at the same time, you’d need to ask yourself what would happen to the money.
If you’re not married, the money might still go to your surviving partner but there’s no protection from inheritance tax provided by marriage. Inheritance tax may therefore be due on the benefit.
While a policy aligned with your mortgage may well be ‘balanced out’ by the corresponding mortgage liability when your estate is added up for inheritance tax purposes, if you’re planning to leave Life Insurance over and above your mortgage you may still have an inheritance tax issue.
How Much Does Joint Life Insurance Cost?
The cost of Joint Life Cover will normally be priced based on a variety of factors, with the biggest being how much you choose to insure.
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Other factors that will influence the cost of Joint Life Insurance for couples include:
How long you want to insure yourself for – the older you are when the policy ends, the higher the risk of you claiming and so the higher the price
The age of the oldest person to be insured – with Joint Life Cover, risk is priced based on the oldest individual to be covered
The type of cover you choose – Whole of Life Insurance, with a guaranteed payout, is typically far more expensive than a Term Insurance policy with a limited payment window
Optional additions – adding Critical Illness Cover to your policy, for instance, will significantly increase the cost of your cover, albeit while expanding the breadth of coverage
Your smoker status – smoking shortens life expectancy, so smokers are charged more for Life Insurance to compensate for the increased risk that they’ll make a claim
Your medical history – pre-existing or current health conditions may have an impact on the cost of your cover, with the potential for your policy to be ‘rated’ or ‘loaded’ depending on the condition and the insurer.