No one likes to think about life insurance. I can tell you from experience, however, that there’s a peace of mind knowing that the people I care about will be taken care of if something happens to me.
Hopefully I’m around for many, many… many years. But if I’m not, life insurance could be the determining factor as to whether my loved ones will need to make lifestyle changes or not, if that time comes earlier than anticipated.
There are many different types of insurance, and most of us are familiar with the kind that we take out individually. But there’s also life insurance for couples to take out together. It’s called joint life insurance.
What is joint life insurance?
As you probably know, life insurance pays out a lump sum in the event of someone’s death. Most of us have heard about this before.
A normal insurance policy covers one person. For example, if I have a $1,000,000 life insurance policy and I die, the life insurance company will pay out $1,000,000 to the beneficiary I name on the policy.
A joint life policy is different. It is a kind of couple’s life insurance policy that covers both my wife and me with the same death benefit in only one policy.
When does a joint life policy pay the death benefit if it covers both spouses?
The way a joint life policy pays out depends on which type of joint life insurance is purchased. There are two different types: “first-to-die” and “second-to-die.” These might be self-explanatory, but let me give a brief explanation.
Let’s say my wife and I have a $1,000,000 joint life insurance policy. Here’s how the policy could pay out:
- First-to-die policy: $1,000,000 is paid out when one of us passes away and the other one is still living.
- Second-to-die policy: $1,000,000 is paid out after both of us have passed. It pays nothing when the first one of us dies.
Do I even need life insurance?
Life insurance makes sense to purchase if you meet one or more of the following criteria:
- Someone is dependent on you for a portion or all of their living expenses and you haven’t yet built up the assets they can live on without your income.
- You have a history of poor health or a family history of poor health.
- You want to leave money to a charity or to someone who isn’t financially dependent on you.
Reason No. 1 is the main driver of people buying life insurance. But this reason runs out when you’ve built up enough of a nest egg to provide financial support without generating an income.
It’s just like preparing for retirement. Can you and your family make it if you didn’t have any income anymore? If the answer is no, then you probably need life insurance.
One thing about student debt: Federal student loans get discharged upon death. Someone with six-figure student debt in their name would not need life insurance to cover the debt or the payments.
Private debt sometimes may be discharged but often wouldn’t be. Check with your loan servicer. If your private loan debt would not be discharged upon death, then you’d want to have enough life insurance to cover that too.
Who should consider joint life insurance?
We’re going to focus on the first-to-die policies here because they’re more common and more likely to meet the reason someone would purchase life insurance in the first place.
Remember that life insurance should cover any financial gap that would exist after the loss of their income and that these policies will pay out the same regardless of who passes away first.
For that reason, two spouses who would purchase a similar amount of life insurance could consider a joint policy. If both my wife and I would buy a $1,000,000 policy, then it probably makes sense for us to explore a joint policy. Conversely, if I would need a $500,000 policy but my wife would need a $2,000,000 policy, then it could be cheaper for each of us to buy individual insurance versus a $2,000,000 joint life policy.
The other situation that could make sense for a first-to-die life insurance policy is if both spouses are in fairly good health. If one spouse has health issues, then it could be more expensive to insure them together versus separately.
Should I get term or permanent joint life insurance?
Just like all insurance, joint life policies come in the form of term and permanent (aka whole life and universal). Whereas term insurance simply covers the death benefit for a defined period of time, whole life and universal policies cover the death benefit and also have an investment component.
Despite the promises made by those who sell permanent insurance, just about everyone would be better off buying term and investing on their own. Permanent insurance has some of the highest fees and commissions of any financial product out there.
People with student loans on income-driven repayment plans should absolutely forgo investing through life insurance and max out pre-tax retirement plans instead to lower their adjusted gross income, which would lower their student loan payment.
How much life insurance do I need?
There are any number of ways to calculate how much life insurance you should get, whether it’s individual or joint life insurance. Some say 10 to 12 times your income; others say pay off your debt and forecast your expenses.
If you want a super easy calculation to figure out how much insurance to get, here it is:
Debt owed (not including federal student loans in your name) + (your proportion annual expenses based on income – debt payments) * 25
Here’s an example of what that calculation would look like in practice for a couple:
Let’s say Sara and James have $25,000 in credit card debt (toward which they pay $500 a month) and a $300,000 mortgage ($2,000 monthly payment). They each make $100,000 per year. Together, they spend $10,000 per month. Here’s how much life insurance they should consider purchasing:
($300,000 + $25,000) + ($4,500 x 12 months x 25) = $1,675,000
They could round up to $2,000,000 life insurance policy if they wanted. It might only cost them a couple extra bucks a month because a term life policy is so inexpensive.
How to shop for joint life insurance
I recommend getting quotes for both individual term policies as well as joint term policies to see which is cheaper. You’d also want to get each quote from a highly rated insurance company, such as one you’ve probably heard of before.
Avoid any insurance company that is also trying to manage investments for you, whether it’s within a permanent policy or a separate retirement or brokerage account. Their fees and commissions tend to be among the highest out there, and you can invest inexpensively at a place like Betterment, Vanguard, or Schwab for example. Find a place that will sell you life insurance without selling other products to you.
It’s also important to compare multiple life insurance policy rates to get the coverage you need while keeping your cost as low as possible. Shop more than one company to get the best rates. You wouldn’t want to only go to Prudential, Pacific Life, or Allstate, for example, because they can only show you their rates.
If your health is ok, then one of the best ways to shop for life insurance would be to go to a website where you can compare multiple life insurance quotes. Check out PolicyGenius, for example, for this kind of online tool.
Remember that life insurance — whether an individual or joint life policy — is a critical component of financial planning for people with dependents, so it’s important to put a policy in place, especially if you have kids. The tips listed above will help you keep as much money in your pocket as possible while getting the coverage you need.
Feel free to email me at Rob@StudentLoanPlanner.com. I’d love to hear your feedback and answer any questions. I personally don’t sell life insurance, so I can be an objective third party.