The following question is about which type of term life insurance to buy:
We are a married couple (30 & 25 years old) expecting our first child in June. I have mortgage insurance for about $170K. Now we are looking to purchase a term-insurance policy of around $500K. My question is what do you think of joint first-to-die policies. These policies are cheaper compared to purchasing two term policies.
Congratulations on your baby and I hope everything goes well. One of the reasons I love writing this blog is that I am learning new things all the time. For example, I did not know that couples can purchase a term life policy, which pays out when the first of the two policyholders die. According to this article, the premiums on a joint first-to-die policy are about 15% cheaper than two single policies offering the same coverage.
One drawback I can think of with joint first-to-die policy is that if both of you were to die, the benefit amount would be the same as one of you passing away. If both of you are working and something were to happen to one of you, the other would likely manage just fine after an initial period of mourning. In the worst-case scenario (both of you dying) though, your child would need financial support for more than twenty years and for about 15% more in premiums, you could purchase two policies that would double the coverage. In any case, I am not an expert on this topic and I welcome comments from our readers.
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17 responses so far ↓
1 Mike // May 27, 2007 at 10:44 pm
Congrats on the baby!
I can’t answer the question but I would suggest they lose the mortgage insurance and get term insurance for that as well. Ellen Roseman wrote a pretty good article showing the high cost of mortgage insurance http://www.thestar.com/Business/article/205853
2 The Financial Blogger // May 28, 2007 at 6:39 am
Congratulation for the baby!
If you have a joint first-to-die policy and both of you die in the period of 45 days, your amount of insurance doubles. I don’t know if this is a special feature or not, but I do have it on mine. Also, you should cancel your mortgage insurance and increase your life insurance policy. At your age, it should be much cheaper this way. With your new baby, you should also consider looking for lack-of-sleep insurance.
FB
3 Canadian Capitalist // May 28, 2007 at 8:04 am
Mike, FB: Thanks for the comments. Good point about mortgage life insurance being poor value.
4 Middle Class Millionaire // May 28, 2007 at 9:16 am
I agree 100% about the mortgage insurance. Cancel it.
Thanks for pointing out this product, I also have a baby on the way so I’ll be looking at life insurance soon. Any suggestions re-insurance companies? or are first to die policies pretty standard?
Cheers,
MCM
5 Canadian Capitalist // May 28, 2007 at 9:22 am
MCM: Congratulations on the baby! We purchased our term policies from our insurance agent at the Co-operators. I did not shop around too much because the premiums were comparable to the quotes I got from the term4sale website. The agent did not explain first-to-die policies to us (we were looking for two independent policies), so I am not sure how prevalent these policies are. One suggestion I do have is to get coverage as soon as possible and not wait till the baby arrives. The entire process takes a couple of months.
6 ThickenMyWallet // May 28, 2007 at 10:34 am
The one thing I found out about a first to die policy is that it may help if one of the parties is an insurance risk individually. You may be able to piggy back on the health record of the other couple (but it depends on who you go with as an insurance carrier).
One other point- a lot of bank insurance products are actually insurance company products white-labelled for the banks (i.e. more expensive). You may consider going straight to the source to get insurance.
Best of luck with the new family.
7 Jon D. // May 28, 2007 at 1:43 pm
Link to Canadian Term4Sale website offering term life insurance quote comparison:
http://www.getterm.cc/
Ditto, drop the mortgage insurance. Each mortgage payment you make, your insurance payout drops essentially. So why keep paying the same premium?
8 FourPillars // May 28, 2007 at 2:08 pm
I just got life insurance this year - most from work but I also got a $250k for 10 years from RBC Insurance, their rates were reasonably competitive.
One thing I didn’t realize is that you can cancel your policy at any time so rather than trying time your policies so they expire when you want them to…go for a longer term ie 20 years and just cancel when they are not needed anymore.
For this reason you might want to make sure that you can either downgrade the insurance amount in the future or be able to cancel parts of it.
In my case I have about $750k coverage right now but in ten years, I won’t need that much, so I’d like to be able lower the coverage amount.
9 FourPillars // May 28, 2007 at 2:09 pm
Oh and thanks CC for adding me to your blogroll.
Much appreciated!
Mike
10 Riscario Insider // May 29, 2007 at 1:41 am
A Joint First To Die (JFTD) policy is essentially two single policies bundled together. That’s why a death benefit can be paid on each life. Insurance policies have an administration charge built-in. With JFTD, you save one admin fee. Since actuaries love playing with numbers, they may translate the two lives into an equivalent single age, which should also lead to savings (e.g., male nonsmoker 30 + female nonsmoker age 30 = male nonsmoker 38, say).
JFTD is used mainly in the family market because of the cost savings from bundling. For larger policies, the admin fee (generally a flat amount) becomes a smaller percentage of the premium. So two single life policies are usually purchased. This gives more flexibility. For example, each spouse can have a different amount of coverage. Upon divorce or separation, the policies are already separate (may need insurance for other purposes then).
Some policies let you convert a JFTD policy into two single life policies under certain circumstances. That feature may be useful should your circumstances change.
Your advisor can help you find a good solution.
11 FinancialJungle // May 29, 2007 at 4:03 am
Has anyone looked into the possible saving of combining life and disability policies? From the insurance companies’ point-of-view, they’re on the hook when selling the policies to two different individuals. When they sell both policies to the same person, it’s not possible for that person to claim dealth benefit and then disability.
12 FinancialJungle // May 29, 2007 at 4:07 am
FourPillars, I figure the longer the term, the higher the premium. When you cancel the term early, it should work in favour of the insurance co. Now they can sell the same policy to someone else with similar risk-profile for a higher premium.
13 FourPillars // May 29, 2007 at 10:31 pm
FJ - that’s very true. Now that I think about it, that’s probably why I went shorter term.
14 Riscario // Jun 1, 2007 at 12:34 am
FinancialJungle: insurance policies essentially promises printed pieces of paper. So it’s easy to produce another policy contract without waiting for an earlier policy to be cancelled. There isn’t overbooking as with hotel rooms or airline seats
Different benefits can be combined in one policy.
The drawback of going with too short a term is the high prices at renewal should your needs change. For example, a male nonsmoker age 30 buying $500,000 of coverage pays $300/yr for 10 years and then rates jump to $1,130 with Term 10. In contrast, Term 20 costs $445/yr for 20 years.
15 Craig Hatcher, CEP // Jun 6, 2007 at 1:17 pm
Congrats on your baby! Joint life first to die is nearly impossible to get in the US. It is the ideal coverage to have if you are a US citizen and your estate is large enough to be liable for federal estate taxes when you both have passed away. Why first to die? The death benefits can be paid to an Irrevocable Life Insurance Trust whose assets are apart from the taxable assets of the family. The trustee of the ILIT can then (1) invest the death benefits in a second, single premium policy, for the surviving spouse if greater coverage is needed for a growing estate, or (2) place the dath benefits into an SPDA and pay the interest to the surviving spouse as a retirement supplement. The principal would then be lest for the estate’s heirs to address estate tax issues. Traditional second to die does not have these options and may cause a problem A large second to die policy in an ILIT still requires annual gifts to keep in force after the first spouse dies. This may be difficult for a surviving spouse to maintain. For estate tax planning, first to die is an excellent product. Too bad few, if any, US companies carry this product anymore.
16 mayank verma // Jun 5, 2008 at 11:48 pm
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17 InsureCan // Jul 30, 2008 at 10:41 am
Your original post said:
“These policies are cheaper compared to purchasing two term policies.”
Is it? Are you sure? Did the purchase compare the difference in premiums between Joint First to Die life insurance and two seperate coverages? In my experience the difference in premiums is 5% at the most - and in many cases less.
And while JFTD is suitable for certain circumstances, mom and pop family coverage isn’t generally one of them. There are drawbacks to JFTD in those circumstances. I’ve detailed some of them here:
http://www.thetermguy.com/2007/12/20/joint-first-to-die-life-insurance/
I just ran a quote from Compulife for a male and female age 40, 20 year term for $500K. Individual coverage quotes at $106.65. A joint first to die policy quotes at $102.15. So $4 a month difference. Not anywhere near as substantial as most people would expect.
There’s a couple of reasons for this. First, what’s the probability that one person dies in a year? Pretty slim. What’s the probability that one person out of 10,000 die in a year? Pretty good. So the more people who are insured under a joint policy, the greater the likelihood that the insurance company will have to pay. So there is a greater chance that the insurance company will have to pay on a joint first to die policy than a single insured. So, premiums have to be higher than for a single insured.
Secondly, JFTD isn’t a very competitively priced product in the marketplace. Conversely, 10 and 20 year term individual coverages are probably the most competitively priced life insurance products on the marketplace today. Prices are so razorsharp that a 10 year term premium is likely cheaper than 5 year term (yes, they’ll guarantee premiums for 10 years at a cheaper price than they’ll guarantee them for only 5 years). That competition in pricing again contributes to individual term insurance prices being razor sharp compared to a joint policy.
In short, make sure you’re aware of the potential drawbacks to JFTD life insurance and make sure you’ve educated yourself on the actual premiums instead of assuming that JFTD is cheaper.
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