What Kind of Life Insurance Policy Covers Two or More?

Life insurance policies can provide financial protection for more than one individual under a single contract. These policies are designed to cater to various relationships, such as spouses, domestic partners, or business associates. Their primary objective is to deliver a death benefit to designated beneficiaries, helping them address financial needs.

Policies Designed for Multiple Lives

Life insurance covering two or more individuals falls into two main categories: first-to-die and second-to-die. These policy types are structured to address different financial planning objectives for couples or business partners.

First-to-die life insurance policies provide a death benefit upon the passing of the first insured individual. This type of policy is commonly used by married couples or business partners who want to ensure financial support for the surviving party. The payout can help cover shared financial obligations like a mortgage or provide income replacement for the surviving spouse. Once the death benefit is paid out, the policy generally terminates, meaning the surviving individual would need to seek new coverage if they still require life insurance.

Second-to-die life insurance, also known as survivorship life insurance, pays out the death benefit after the death of the last surviving insured individual. This policy is frequently used for estate planning purposes, particularly for high-net-worth families. The payout can help beneficiaries cover potential estate taxes or other settlement costs, preserving inherited assets like a family business or real estate. While commonly purchased by married couples, second-to-die policies are also suitable for business partners aiming to ensure business continuity or fund buy-sell agreements upon the passing of both partners.

How Joint Policies Function

Joint life insurance policies are single contracts designed to cover multiple individuals, not a collection of individual policies. This structure means one death benefit is typically paid out according to the policy’s terms, streamlining coverage for those with shared financial interests.

Premium calculations for joint policies consider the ages, health, and other risk factors of all insured individuals. Although a joint policy covers two lives, it can sometimes be more cost-effective than purchasing two separate individual policies, especially if the insureds are of similar age and health. The combined risk profile of both individuals influences the overall premium amount.

Eligibility for joint policies requires an insurable interest between the individuals being covered. This means one insured person’s death would cause a financial loss to the other. Common relationships that demonstrate insurable interest include spouses, domestic partners, and business partners.

Policy ownership for joint life insurance can be structured in several ways, often involving joint ownership by the insured individuals or ownership by a trust. Joint ownership allows both parties to control the policy, though decisions typically require mutual agreement. Placing ownership in an irrevocable life insurance trust (ILIT) is a common strategy, particularly for second-to-die policies, to help ensure the death benefit is not included in the insureds’ taxable estates.

Important Considerations for Joint Coverage

When considering joint life insurance, several practical aspects require attention, from underwriting to managing the policy over time.

All individuals proposed for coverage under a joint policy undergo an underwriting process. The health status, age, and lifestyle of each person can significantly influence the policy’s approval and the final premium cost. A less healthy or older applicant among the insureds can result in higher premiums for the entire policy, or in some cases, make obtaining coverage more challenging.

Beneficiary designation in joint policies determines who receives the death benefit. For first-to-die policies, the surviving insured typically becomes the beneficiary, while for second-to-die policies, beneficiaries are often heirs, a trust, or an estate. Policyholders must explicitly name beneficiaries, as a spouse is not automatically designated. If multiple beneficiaries are named, the policyholder must specify the percentage of the payout each will receive.

Policy changes and riders can be more complex with joint policies due to multiple insureds. Riders, which are optional add-ons, can provide additional benefits or modify coverage. An example is a waiver of premium rider, which can suspend premium payments if an insured becomes disabled. While adding or removing an insured from an existing joint policy is rare, some policies may offer provisions or riders for certain life events.

Contingency planning is a necessary consideration for joint policies, especially for those covering spouses or business partners. Events like divorce or business dissolution can complicate policy ownership and beneficiary designations. In such scenarios, discussions about policy splitting, changes in ownership, or alternative coverage options become essential to avoid unintended consequences. It is important to review the policy’s structure and consult with legal or financial professionals to navigate these potential changes effectively.