Should I choose joint or single life insurance?

Life insurance will pay a cash lump sum to your dependants if you die, or are diagnosed with a terminal illness with a life expectancy of less than 12 months, during the term of the policy. But should a couple choose joint life insurance, or two single life insurance policies? 

What is life insurance?

Life insurance is a simple form of protection that will pay your dependants a cash lump sum, if you die during the term of the policy. This money can be used to support your dependants for a number of years and/or to pay off a large debt such as your mortgage.

As some life insurance policies also pay out if you are diagnosed with a terminal illness with less than 12 months to live, this can help ease your financial burden at a difficult time. 

What is the difference between joint and single life insurance?

You may have heard that joint life insurance for married couples and civil partners is cheaper than buying two single life insurance policies. But how are the two types of policy different? 

A single life insurance policy is a level term life insurance policy. You choose the term and the sum you are insured for and pay monthly premiums to your insurer. 

Should you die during the term, or be diagnosed with a terminal illness with a life expectancy of less than 12 months, the insurer will pay the cash lump sum to your dependants. 

A joint life insurance policy offers the same benefits as a single policy, but covers 2 people. However, it only pays out once, on a ‘first death’ basis.

If one partner dies (or is diagnosed with a terminal illness) during the term of the policy, and they have a joint life insurance policy for £250,000, this is the cash lump sum that would be paid to the surviving partner. Once one person has died the joint life policy ends, even if there are many more years left on the term.

Should both partners die at the same time (for example, in an accident) their dependants would receive one payout.

It is possible to set up a joint life insurance policy to pay out only when the second partner dies (so after both people in the couple have died) although this is less common.

Joint life second death insurance, which pays out upon the death of both partners, used to be readily available, but is much rarer now.

Do I need life insurance?

The first thing to point out is that life insurance pays out to your beneficiaries when you die.  Someone that is single, with no one relying on them financially would probably have no need for life insurance.

However, if you are part of a financially committed couple and would like to leave your partner a cash lump sum to help replace your income should you die, life insurance can be a good idea.

Having life insurance becomes even more pertinent if you have children who depend on you financially. 

Even if your partner is not working, they should still consider taking out some form of family life insurance. After all, if they were to die, could you manage to pay for the mortgage and all the bills by yourself?

What are the benefits of joint life cover insurance?

The main benefit of a joint life insurance policy is that it is often cheaper than two single policies. This is mainly because the policy only pays out once. 

However, according to Zurich Insurance, statistics suggest married and cohabiting couples tend to live longer than single people, so this is another reason insurers can offer cheaper cover. 

Joint policies tend to be cheaper than two single policies for couples that are around the same age and in similar health.

If you are in a committed relationship with shared finances but don’t have any children, couples life insurance could be a good option. You really only need cover if one of you dies, to ensure the remaining partner is taken care of. 

Drawbacks of joint life insurance

Of course, the main drawback of having joint insurance are the problems arising if you should split up. 

As a joint term insurance policy cannot be split in two, you would probably have to cancel the cover and take out two single life insurance policies instead. However, as premiums tend to increase as we get older, this could result in more expensive premiums.

Joint term life insurance that pays out after the first death may not be suitable for couples with children who depend on them financially. If one parent died, the surviving parent would be left without life cover. In this case two single policies may be a better option.

How much life insurance do we need?

The amount of insurance required can vary widely according to your situation and indeed disposable income. However, for many people, the aim is to provide enough money to pay off any outstanding debt, such as the mortgage, as well as provide your partner with some money for living expenses. 

For many, this would equate to 10 times the main earner’s salary. So, if one partner earns £25,000, they would require £250,000 of life cover.

Life insurance through your employer

You may find you already have some life cover in place. Some companies offer employees group life insurance in their benefits packages, or ‘death in service benefit’, which will pay out a multiple of your salary, should you die while an employee. 

For example, if you earn £30,000 a year and you have death in service benefit worth 4 times your salary, you would be covered for £120,000. While this may not be enough cover to pay off your mortgage and provide living expenses for your partner should you die, it reduces the amount of extra cover you need.

If one partner has life cover through their employer while the other doesn’t, a joint life policy may work out to be more expensive.

For example: A couple needs £250,000 of life insurance. 

Partner 1 requires £130,000 worth of cover, due to having £120,000 death in service benefit through their employer. Partner 2, on the other hand, has no cover and requires the full £250,000.  

This couple would need to search for joint insurance quotes for £250,000 (the larger sum). 

In this case, two single policies (one for £130,000 and another for £250,000) could be cheaper than a joint policy.

What’s more, if one of you is older/a smoker/has underlying health conditions, this could drive up the cost of a joint policy, in which case two single policies may also work out cheaper.

What affects the price of joint life insurance?

Insurers take a lot of information into account when calculating life insurance premiums, such as your age, medical history, what you do for a living and if you smoke.

Life insurance tends to cost less, the younger you are. Women tend to live longer than men, which results in cheaper premiums. Being a smoker will drive up the price of your cover, as will underlying health conditions. You’ll also find dangerous hobbies and hazardous occupations will make your cover more expensive.

Taking the decision to give up smoking, drink less and improve your fitness, will not only improve your health, but can reduce the size of your life insurance premiums, too.

Be honest about your medical history

You may be asked to undergo a medical before an insurer will cover you. Even if you do not need a medical, it is vital to disclose anything that might be relevant when taking out the policy. Insurers will not hesitate to refuse to pay out for any pre-existing issues they were not informed about.  

How to find the best joint life insurance companies

You can search for single and joint term life insurance quotes online from comparison sites, insurance companies, banks, credit card companies, and even retailers.

However, you may be able to obtain cheaper cover by seeking advice, particularly if you have underlying health conditions. 

Insurance brokers and independent financial advisers can offer specialist advice for your particular situation, and may be able to find suitable cover at a competitive price. While you may pay for their advice, you could find you save money in the long run.

Buying a life insurance policy

When you are happy you have found the best life insurance policy that meets your needs, make sure you read the small print carefully. It’s essential to know what is and isn’t covered and to get anything you are unclear about explained by the provider, or your broker/adviser.

Remember, you have the right to change your mind within 30 days, during which time the provider must offer you a full refund.

Inheritance tax (IHT)

Once you’ve got your life insurance policy set up, it is time to think about tax planning as that cash payout is not immune to the clutches of inheritance tax.

Fortunately, with a joint life insurance policy, things are quite straightforward. Should you die, the payout should go directly to your partner and should not be subject to inheritance tax.

However, with other types of life insurance things are a little more complicated.

Life insurance policies can be written into trust, which means they are classed as an asset and avoid becoming part of your estate. Not only does this protect them from inheritance tax, it means they are paid out to beneficiaries directly. 

Writing a life insurance policy into trust can be as simple as filling out a form with your insurer, but it is prudent to get advice from an expert regarding your situation first. 

Keep your cover up to date

With most life insurance policies lasting between 10-50 years, you’re bound to have a few lifestyle changes. You may move job and be offered better life cover, have a child, or move house and increase your mortgage. 

All of these factors can influence the amount of cover you need, which makes re-assessing your cover from time to time a good habit to get into.

What happens if your life insurance provider collapses?

Finally, with the COVID-19 pandemic causing many companies to struggle or even collapse, you may be concerned about taking out such a long insurance policy. What if the insurer collapses in the next 20 years?

Thankfully, protection is available. The Financial Services Compensation Scheme (FSCS) that protects UK bank accounts covers life insurance policies, too. 

Check the Financial Services Register to ensure your insurer is listed.

25th August 2020