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moneysense.ca, 27/05/07
Reader Question: Joint First-to-Die Life Insurance Policy
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.
moneysense.ca, 27/05/07
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
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
Mike, FB: Thanks for the comments. Good point about mortgage life insurance being poor value.
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
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.
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.
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?
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.
Oh and thanks CC for adding me to your blogroll.
Much appreciated!
Mike
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.
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.
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.
FJ – that’s very true. Now that I think about it, that’s probably why I went shorter term.
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.
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.
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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.
“InsurCan” writes:
“JFTD isn’t a very competitively priced product in the marketplace.” Nonsense!
Joint, First To Die (JFTD or J1) is not a “product” but is a product CONFIGURATION. In other words – and I’m surprised that an insurance salesman wouldn’t know this – 10 and 20 year term products are available in single life configurations as well as other configurations such as J1, CBD (Combined Billing Discount), etc.
Instead of falling for generalizations, check for yourself. The webite http://www.winquote.net is the most comprehensive and most objective for Canada. It’s a consumer resource that quotes the largest number of insurance companies, the largest number of products, the widest array of products, discloses the renewal costs, etc. – but doesn’t ask for your name or telephone number. In addition, and related to the discussion in this thread, it’s not limited to single life configurations only but also quotes the products – including the 10 and 20 year term, etc. – for Joint Life, including J1 (Joint First To Die), J2 (Joint Last To Die), as well as for Combined Billing Discount configurations, etc.
Moreover, if you are dealing with a broker rather than a single company captive agent, it may be to your advantage to check out the opportunities under “Multi-Life”. This is particularly so if the two individuals differ in gender, present or past tobacco use and (health and other) risk aspects, dates of birth, etc. In some cases, it may actually turn out to cost less in total to have one of the individuals insured with one company and the other with another.
Another matter to consider, a matter that hasn’t been raised yet in this thread, is that most term insurance policies base their pricing on “Age Nearest”. What this means is that if you are 39 years old and your 40th birthday comes up in just under 6 months, most insurance products will be quoted at you for age 40 rather than age 39.
The difference of one year in “Insurance Age” could mean thousands of dollars of difference in the premium costs of the policy over the years. There are two pieces of good news, however. The first is that if your upcoming birthday is less than 6 months away but more than 4 or 5 months months away – and WHEN REQUSTED – insurance companies may accept backdating of the contract date to “conserve age” (ie, to give you the same coverage at a lower premium). The second piece of good news is that there are thousands of consumer interest oriented brokers across the country who are equipped with the LifeGuide Professional Software with its built-in capabilities to automatically detect “age conservation” opportunities that may exist. In a nutshell, a LifeGuide equipped broker may successfully lower your premium costs beyond the prices quoted on-line.
Simply ask your broker to provide you with a LifeGuide survey before you commit to signing an application. You may save thousands by doing so.
A few additional notes as addendum to the above:
1. The J1 (Joint, First To Die) configuration (when the circumstances merit) is a worthwhile consideration for TERM insurance but generally not so for “permanent” insurance nor “term” insurance having a period longer than 20 years. (Note: every rule has exceptions, including this one)
2. Likewise, J2 (Joint Second To Die or Joint Last (of two individuals) To Die) is a worthwhile configuration consideration for “permanent” insurance but not for “term” insurance. (Here, also, there are rare exceptions).
3. When you negotiate to buy a house or a car – and even when you just rent a car while on holidays – you get a chance to read the contract before you commit. Term insurance contracts and other life insurance contracts are not “standard” identical documents. To the contrary, the contracts may substantially differ in their wordings, definitions, provisions and exclusions. Likewise, the application forms also differ as do the definitions for such fundamental aspects as “preferred” (and its various marketese permutations). WATCH OUT for such questions as those involving present or past tobacco use. For example, as far as nearly all insurance companies are concerned, if you had last cigarette more than a year ago but were ‘on the patch’ or nicotine gum or the like up to 11 months ago you are a smoker, not a “non-smoker”. A mistakenly or intentionally made misrepresentation in such a matter may void your contract altogether. If you don’t understand a question or a statement fully, ask the agent/broker to explain it to you fully. Make sure that each and every question on the application form (which, incidentally becomes part of the contract) is answered FULLY and truthfully. If you are going to pay those premiums, you want to make sure that the contract will be valid when and if the covered unthinkable happens.