Single or joint life insurance policy: which should couples choose?
Life insurance is all about supporting your loved ones. You pay in over a period of time and if you die within a specified period, it will pay out to your family. The money can be used for anything – household bills, child care costs, mortgage payments or even funeral expenses.
The amount needed varies greatly from person to person – the size of the mortgage, how many dependents still live at home. It will also depend on existing assets and the insurance cover you have elsewhere. For example, you should consider how much you may receive from your employer – many have a ‘death in service’ benefit, which can amount to three-four times your salary.
Self-employed, or those running their own business, will not have automatic provision, so they will need a larger lump sum.
Once you’ve considered these points, it’s also worth sitting down with your partner or spouse to work out whether you should each get an individual life insurance policy or a joint scheme.
Single vs joint life insurance policies
Industry estimates suggest in terms of decreasing term plans (lump sum paid if someone dies during the policy’s term), 30% are taken out as single policies and 70% are joint. On level term assurance (fixed cover over time) 60% are taken out as single policies while 40% are joint.
A single life insurance policy is yours to keep and it is tailored to your specific needs while a joint life insurance policy, which can be bought by co-habiting couples or married partners, covers you both under a single policy. An important difference is that with single policies, if both parents died for instance, children would be left with two payouts. With a joint policy, there would only be one payout.
Under a joint policy which tends to be cheaper than two singles, couples can choose to buy a ‘first death’ or ‘second death’ policy. The ‘first death’ joint policy is the most popular form with a lump sum paid out when the first of the couple passes away. The ‘second death’ joint policy is usually a whole of life policy (it pays out when you die, not if you die) and it’s mainly used by high net worths for inheritance tax planning purposes.
Rob Harvey, independent protection expert at Drewberry Insurance, says couples can take out joint term insurance, but it may not be the best option.
“Such policies pay out and then end after the first death, leaving the remaining partner without insurance. Potentially, they could then struggle to find new cover on competitive terms as they’d be older and might have developed medical conditions in the interim.
“Although two individual term insurance policies will be marginally more expensive, our clients often find securing two separate pay outs is well worth it.”
Emma Thomson, head of customer care at Life Search, says as a general rule of thumb, advisers suggest couples take out their own policies.
“If two people have a joint mortgage and one passes away and the mortgage was a part of the life insurance policy, then it has done its job and won’t be needed after for that purpose.
“But sometimes one of the challenges is that joint life cover is just taken out to cover the mortgage but not for other liabilities or children, for instance.
“And if you need life cover when you’re older and when your health may have deteriorated, the surviving partner will be left with no cover.”
The other issue which may impact a single or joint life insurance option is divorce or separation.
Thomson says we’re living in a society where divorce and separation happen and not all policies are flexible to support this change in circumstances. They may not ‘flip’ the cover or some may adapt the policy as long as some caveats are met. It may stipulate that a change must be done within a certain amount of time post divorce which may be difficult as not everyone gets divorced straight away – there may be a period of legal separation instead.
Another important consideration is your health at the time of taking out a policy. Thomson explains that not every insurer underwrites in the same way so for example, if one half of a couple has a history of depression while the other has asthma, the partners won’t get the same term as part of a joint life insurance policy. “An individual policy will be tailored to your separate needs”, she says.
Tax and Trust considerations
With a joint life policy, the money automatically goes to the surviving spouse and in this situation, no inheritance tax is payable.
For those with single life insurance policies, Thomson says it’s vital to put the policy in a trust. She explains that trusts enable you to decide where your money goes, particularly of benefit to those who may have more complex family situations, such as children from a previous marriage or who want to support family members other than a spouse.
As your wishes are made clear, a policy in trust can also avoid probate, speeding up payments and can protect the money from creditors if the deceased has debts. Essentially having a trust means the money is currently outside of the deceased’s estate for inheritance tax planning purposes.