The Ins and Outs of First-to-Die Life Insurance

Couples who want to purchase life insurance that has a manageable premium often opt for a joint plan, and one budget-friendly option for joint coverage is first-to-die life insurance. Although these plans only provide a single death benefit, which is payable upon the death of the first covered partner, they may suit the unique needs of some families. This article provides an overview of first-to-die life insurance plans and explores the pros and cons of this type of policy.

What Is First-to-Die Joint Life Insurance?

First-to-die life insurance is a single-contract policy that covers two lives, paying a death benefit when the first covered partner dies. Although the payout is designed to replace the earnings of the deceased partner so the beneficiary may maintain their lifestyle standard, funds from the death benefit may be used any way the beneficiary chooses. First-to-die and other joint policies may be purchased by married couples, business partners or other financially linked pairs who may benefit from this budget-conscious coverage.

How Does First-to-Die Life Insurance Work?

When purchasing first-to-die life insurance, participating couples or partners sign a single contract that covers both lives, and each partner on the policy is the other person’s official beneficiary. The policy has a single premium, which must be paid according to the contract terms to maintain coverage.

When the first of the two covered individuals dies, the policy’s death benefit pays out to the surviving partner. This money may be used any way the beneficiary chooses.

Because first-to-die life insurance pays out a single death benefit, the policy terminates upon payout, leaving the survivor without coverage. However, some plans may permit the remaining partner to convert the policy into individual coverage at this time. Keep in mind that premiums may be prohibitive, and companies may offer policyholders a narrow window for conversion.

The Advantages and Disadvantages of First-to-Die Insurance

Before purchasing a first-to-die life insurance policy, it can be helpful to consider the advantages and disadvantages of this type of plan.

The advantages of a first-to-die life insurance policy include:

• Cost: First-to-die life insurance policies are typically cheaper to purchase than two separate individual policies, providing at least some coverage to individuals who may otherwise have difficulty affording the higher premiums that come with more comprehensive plans.
• Single premiums: Couples who maintain individual life insurance policies must pay two separate premiums. Because first-to-die policies have a single contract that covers two lives, they only have a single premium. That means fewer administrative fees and other associated expenses.
• Increased insurability: First-to-die policies may be a viable coverage option if one partner is deemed uninsurable because of health risks.
• Term length: As long as premiums are paid, first-to-die policies guarantee a death benefit to one partner, regardless of their lifespan. Individuals who opt for separate term policies lose coverage after a predetermined period of time.
• Income replacement: First-to-die policies can serve as income replacement for a spouse who passes away, letting the surviving spouse pay off debt and/or maintain their current lifestyle standards.

The disadvantages of a first-to-die life insurance policy include:

• Single payout: Because first-to-die policies only offer a death benefit when the first partner dies, the surviving partner is left without coverage.
• Potential legal complications: First-to-die life insurance policies may be difficult to split if a couple legally separates or divorces.
• Health discrepancies may affect premiums: Because medical underwriting processes are used when issuing a policy, the plan's premiums may be higher for couples where one partner is healthy and the other isn’t.

Who May Benefit From First-to-Die Life Insurance?

First-to-die life insurance provides coverage for married couples, business partners and other pairs who have a significant financial relationship. These joint policies may be beneficial for couples who fall into one or more of the following categories:

• Families with a sole breadwinner
• Families who rely on two incomes to survive
• Couples looking for an affordable alternative to separate individual life insurance policies
• Couples or business partners who have significant debt
• Relationships where one spouse or partner is harder to insure than the other

Second-to-Die Policies: The Other Joint Life Insurance Plan

If you want to purchase a joint policy but first-to-die life insurance doesn't suit your needs, another option is a second-to-die plan. Also known as survivorship insurance, a second-to-die policy pays a death benefit after both covered individuals die. Funds may be paid to dependent children and other familial beneficiaries, charitable organizations or an estate.

Many policyholders use this type of plan as a long-term investment because it lets them transfer wealth tax-free to their children or other beneficiaries. It’s also ideal for parents who wish to provide financial protection for their children in the event of both parents’ premature death.

Choosing a Life Insurance Policy

Choosing the right life insurance coverage can be challenging, and terms may differ by carrier, plan type and individual policy. If you’re thinking about purchasing a first-to-die plan, it may be helpful to consult a licensed insurance agent before signing a contract. An experienced, knowledgeable agent can help you explore the pros and cons of different types of plans so you can find a policy that suits your family’s unique financial needs.