Joint policies may seem attractive because of the cost savings. But it doesn’t cost much more to insure each life individually, and you or your spouse receives double the payout.
For example, if you and your spouse are 30 years old, a joint 10-year term first-to-die policy worth $1 million insures both of you and costs about $787 annually (2014 rates). The contract pays out upon the first insured’s death to the surviving spouse. However, you could purchase two $1-million contracts for an annual premium of about $849. And the total payout from both contracts would be $2 million.
Complications with joint policies can arise if your marriage falls apart.
A divorce doesn’t invalidate a contract, so if you forget to cancel it, your ex-partner could receive an unintended death benefit. Also after divorce, you and your spouse may have to purchase insurance individually (depending on the type of original policy), and if either you or your spouse’s health has worsened, it may be difficult to get new coverage.
Your parents may already have bought you life insurance. In that case, parents usually pay the premiums and are the beneficiaries. The parents own the contract and you are usually appointed as contingent owner. If the parent dies, the ownership automatically reverts to you, the insured child.
When you marry, the family needs to discuss when you should take over the premiums based on financial ability, and whether the beneficiary should be changed to the new spouse. Subsection 148 (8) of the Tax Act allows a tax-free rollover from a parent to a child insured under a life insurance policy. Your uninsured spouse should also purchase a policy, even if he stays at home to care for children, since you would have to pay for childcare if he dies unexpectedly. If you can’t afford permanent insurance for the uninsured spouse, you can purchase term insurance and convert it when your finances are healthier. Make sure the policy you choose has this feature.
If both you and your spouse work, your advisor can help you decide whether to opt out of one of your health plans. For instance, if you have a 50% co-pay in your health plan and your spouse is fully covered, you could opt out of the first plan.
But it could also be advantageous to keep both plans in place. That way, you may first claim under your own plan and then under your spouse’s plan to get more or all of the health expenses covered.
Spouses should talk finance
A 2013 BMO survey shows most married Canadians wish they’d discussed financial matters before walking down the aisle. While 98% of Canadians agree they should be on the same page as their spouses, when it comes to finances, most of them aren’t.
A whopping 40% of these couples say they have different investing styles from their partners.
It’s not surprising, then, that more than half of Canadian married couples have financial regrets, with 62% saying they wish they had discussed their financial pasts and plans before getting married.
Types of policies
Joint policies insure two lives on one contract and are underwritten by combining the health and ages of each life. The premium is determined by the average longevity of the two spouses.
A joint life first-to-die contract pays out when the first insured dies, while a joint life last-to-die policy pays out after the second death. A joint last-to-die policy is better if you want to leave money for heirs or cover taxes after death.
To discuss this further or to book an appointment, contact YourStyle Financial today!