Joint Life Insurance Plans - Second and First-to-Die
A joint or joint-and-survivor life insurance contract is written on more than one life. These contracts are used in a variety of circumstances with different triggers for the payment of policy proceeds.
One form of a joint contract is Survivorship Life, also referred to as “second-to-die” or “last-to-die.” It insures two or more lives and pays the death proceeds upon the death of the second or last insured to die. Some survivorship policies are traditional or interest-sensitive permanent designs, while others, in very rare cases, are even term insurance.
This policy is always priced and based on the probability of having to pay benefits at the death of someone other than the first to die. Since it is a form of joint life insurance, it has premiums that are less than the cost of separate policies on each of the insured individuals. Premiums normally continue after the first death, but some products provide that premiums cease at the first death, or may simply offer this feature as a rider.
With some permanent policies, cash values increase dramatically at the death of the first insured. The basic explanation for this is that the policy is designed to pay benefits following the occurrence of two events—two deaths. The reserves (cash values are a function of reserves) required by the insurance company are definitively lower when payment of the face amount is contingent upon two deaths rather than one. However, when the first insured dies, the death benefit will become payable upon the occurrence of only one death, therefore, the reserve requirements for this contingency become much greater. As a result, the cash value increases substantially after the first death in anticipation of the eminent pay out .
This product is particularly attractive in estate planning situations in which the unlimited marital deduction is used. The unlimited marital deduction allows 100 percent of assets to be passed from one spouse to another at death, or by gift, without paying estate taxes. Upon the death of the surviving spouse, taxes may often be due. The second death triggers payment of the insurance policy benefit and the proceeds may be used to pay the estate taxes and the administrative costs associated with it. It can also be effective in many business and family situations. It is highly beneficial in those situations where a business or family could survive financially after one death, but not after a second death.
Underwriting benefits come from combining two insured's within one policy. It is even possible to get coverage for a person who would be considered uninsurable under individual underwriting standards.
Another form of joint policy, though not as well known is the first-to-die plan, which pays the benefit on the death of the first insured. It could be two people, such as a couple, or more. This product is used primarily in business situations when all the partners are insured for a buy-sell agreement. It is used for pension maximization needs where retirement income is lost when the first spouse dies, for college planning, for retirement planning, or for joint mortgage redemption needs.
It is an effective insurance solution for the dual-income couple when insurance is needed only as family protection at the death of the first parent. It can help meet long-range financial needs in a very cost-effective manner.
There are a growing number of life insurance companies that offer first-to-die riders that could be attached to a survivorship life plan. In this arrangement, a death benefit can be paid at both the first and last death. There are also term riders that can be used with the first-to-die plan that will pay additional benefits when the survivor dies.
About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at 1-800-651-1953 or KMcDonald@Pivot.com.