When to Use Joint Life (First to Die) Life Insurance

In the dual-income family market – Joint Life (JL) may provide a cost-effective means of replacing income at the first spouse’s death. Advisers often recommend joint life to fund specific goals and objectives that depend on the presence of the second of two incomes because the family frequently needs insurance at the second death even more than at the first death. For example, a family might use a JL policy to pay off a mortgage or fund a child’s education in the event one spouse dies. Because the liquidity needs of the family often depend more on when the first death occurs than on which spouse dies first, JL is often a useful tool in conjunction with Survivorship Life (SL).

The JL/SL combination is often a better plan than two single-life policies. For example, assume a husband and wife are each making about the same income and their estate plan calls for maximum use of the marital deduction to defer the bulk of their estate tax until the second death. Assume, as well, that they wish to assure certain benefits for their children, such as funding for education, in the event of either spouse’s premature death and regardless of who dies first. Just for illustration, assume they will need about $1 million at the first death and $3 million at the second death, regardless of who dies first. It would be difficult to determine just what amount of single life insurance coverage they would need on each spouse to assure their goals are met, because they do not know who will die first. However, a JL policy with $1 million of coverage and a SL policy with $3 million would exactly meet their needs.

In the key employee business insurance market – ­Purchase of separate single life policies on all key employees can be costly and at times unnecessary. The cost of a multi-life policy on several key persons will be less than the total cost of separate policies on all insureds. In these cases, the base policy often includes, for additional cost, a guaranteed insurability option that permits all, or selected, remaining key employees to be insured under a new JL policy after the first death without evidence of insurability. Some companies also offer a substitute insured rider that permits the owner of the policy to replace one insured with another, with evidence of insurability. This is an attractive feature if employees in key positions may leave and be replaced by others.

For use in business buy-sell funding – Perhaps the principal use of JL to date has been to fund buy-sell agreements in closely-held businesses. Because it is the first death among the owners that triggers the need, JL is perfectly designed to meet the need. Similar to key employee cases, guaranteed insurability riders and substitute insured riders frequently are attractive options.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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