Life insurance is a financial safety net for a family if either spouse dies prematurely, but is it better for couples to take out a joint policy or to insure their lives separately?
Financial reporter Harry Brennan has investigated the dilemma and found some key differences in the type of policy.
He said: “It can be difficult for people to work out what type of cover is right for them and whether single or joint policies are best.
“Choosing the best policy for you will depend on your own specific circumstances.”
There are two main types of joint policy in which both lives are covered, but only one lump sum is payable on death.
The most common is fixed term cover which has a time limit on the cover – usually around 20 years – which is appropriate when the couple are paying off their mortgage or have the financial future of young children to consider. A lump sum is payable when either of the partners dies.
Whole of life
The second type is a whole of life policy which has no time limit and pays out whenever the insured person dies.
They are commonly used for estate planning purposes and reducing your inheritance tax bill.
“Joint policies are generally cheaper than insuring both lives separately, but there are some drawbacks,” said Harry.
Most policies will pay out after the death of the first spouse, but then the policy ends and leaves the surviving partner without cover. They could take out a single policy, but depending on their age and state of health they may have to pay more in premiums.
Before taking out the policy it’s important to work out who the main breadwinner is and take out the appropriate level of cover. A payout on such a policy may be enough to pay off the mortgage, but if the surviving partner is the lower wage earner they may end up not being able to sustain the quality of life they’re used to.
Harry also warned of the difficulties experienced if couples don’t stay together. He said: “If a couple splits or divorces and one partner no longer wished to contribute, the other will either have to pay the whole premium or the policy will be cancelled and you will receive no money back.
“Even if a divorced couple did continue with a policy, there could be implications on who benefits from the policy payout at a later date, especially if one partner has remarried and has other dependents to think about.”
Opting for two separate policies avoids these pitfalls, but insuring two single lives is more expensive.
Explaining the increased flexibility of separate policies Harry said: “One advantage of having two separate policies is that it allows you to insure different amounts for each partner. You can, therefore, insure the main breadwinner for a larger amount to protect the other partner in the event of a death, and insure the partner who contributes less for a smaller amount, which will allow you to balance the costs versus the reward of taking out two policies.”
He also pointed out that if one partner dies, the other is still insured and both will remain insured if the relationship ends in separation or divorce.
He added: “Separate policies can also be a good fit for couples if one partner has some other form of existing life cover already in place and only needs to insure themselves for a small amount, for example, if they receive life cover through their employer.”
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