ProtectionFeb 27 2018

Joint life policies: A false economy?

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Joint life policies: A false economy?

But while it might be cheaper, it may not offer the best value, especially if either person’s circumstances change in the future. 

Although arranging joint life policies for couples has become the norm, Eric Purdy, an independent underwriting and claims consultant, is keen to see the market move away from this. 

“If you look at the pricing, the saving for a joint life policy compared with two single life policies is minimal. All you are really saving is the second policy fee,” he explains. 

“This means you are effectively paying for half the cover.”

Number crunching

Premium examples from Royal London demonstrate this, as Table 1 shows. A £250,000 25-year joint life policy for a non-smoking couple aged 30 would cost £16.40 a month. 

Table 1: Cost of single/joint life protection

AgeTerm (years)BenefitLifePremium
3025DeathSingle£9.95
3025DeathJoint£16.40
3025Death/CISingle£58.97
3025Death/CIJoint£107.46
4025Death Single£19.87
4025DeathJoint £35.06
4025Death/CISingle£120.32
4025Death/CIJoint£221.56

Notes: Based on a non-smoker, sum assured of £250,000, no TPD nor child CIC. Rates from 6 February 2018. 

Source: Royal London. Copyright: Money Management

 

In comparison, two single policies would cost the couple £9.95 a month each, which means they would only be paying an additional £3.50 a month for double the cover. Over the course of the policy this equates to an extra £1,050 for a potential total payout of £500,000.

As well as providing double the cover, two single life policies also offer greater future proofing. If the couple separated at a later date, they would each have their own life cover, saving the hassle of either splitting the policy or starting afresh.

Although many life policies sold in the adviser market include separation options, allowing each person to walk away with a single life policy based on the sum insured and underwriting information they provided at the outset, this is not always available.

Actioning it can also add complication, as Jennifer Gilchrist, senior product development manager at Royal London, explains: “Most policies include some flexibility in the event of separation, but it is down to the insurer’s terms and conditions. You also need the other person to agree to separate the policy, which may not always be possible.” 

In some situations, an insurer’s terms and conditions may be restrictive. For example, where a policy is linked to a mortgage, an insurer may require evidence of a new mortgage before they will split the cover.

Future-proofing

Where a separation option is not available, keeping a joint life policy with an estranged partner can cause further complications. Andrew Gilbert, head of life products at LV=, says: “If both parties remarry and have more children, there will be a challenge regarding who is entitled to receive the proceeds of the claim.”

While there may be a solution in the event of a separation, this is not an option when one person dies. Although the debt will be cleared as a result of the claim, the survivor would need to start afresh if they wanted to take out cover to protect any dependants. 

Unfortunately, taking out cover at a later date also has the disadvantage of higher premiums. On age alone, the premium for a 40-year-old taking out a single life policy, again for a non-smoker, over 25 years and with a sum assured of £250,000, would have almost doubled to £19.87 with Royal London.

Even selecting a 15-year plan, to take them to the end of the original policy’s term, would mean premiums of £15.85 a month. Premiums could be higher still if any health problems developed. If these are serious, they might struggle to arrange cover altogether. 

Double trouble

Even without death or separation, opting for a joint policy can have disadvantages. The insurer’s assessment of the two individuals’ risks may vary, so although an adviser arranges the most competitively priced joint policy, it may be possible to obtain a better rate by splitting the policy. 

In particular, this could happen where there is a significant difference in the individuals’ ages or health.  There could also be instances where one person may not wish to disclose all their medical information to their partner. This could lead to non-disclosure, with complications if a claim is submitted. 

Further risks come in the shape of the Financial Ombudsman Service (Fos), which might challenge the suitability of a joint life policy. 

Mr Purdy explains: “Although the Fos is in favour of a joint life approach due to the lower premium, a policyholder could complain that they did not know they would be left without cover in the event of their spouse dying. I do think it is an area where our industry does not treat customers fairly.”

Although joint life policies have become something of a habit for the protection market, he adds that it could move away from them without too much bother. “It would require a bit of fancy footwork putting single life policies in trust, but this is straightforward,” he explains.

No more joints

Most insurers offer a free trust form, which can be completed to determine who receives the proceeds of a life insurance policy. Although less of an issue for married couples, where assets can be transferred to one another inheritance tax-free, this has the added advantage of ensuring this money does not end up in the deceased’s estate, potentially increasing their inheritance tax liability.

The situation is slightly different for policies that include critical illness insurance. With these, as any payment for a critical illness claim must go to the person with the condition to avoid any tax liability, a split trust is necessary. This ensures the critical illness payment goes to the individual, while any death benefits go into the trust. These are less common, and the additional complexity makes them more difficult to set up, but most insurers can provide the necessary trust documentation and guidance.    

Many insurers favour the benefits of choosing two single life policies as opposed to a joint life scheme, but some recognise that this might not be such a simple move. 

Roger Edwards, marketing consultant and marketing director at Protection Review, explains: “When we were setting up Bright Grey back in 2002, we did consider launching without joint life policies. But as we would have been the only provider doing this and there was still demand for these policies, we felt we would have been shooting ourselves in the foot.”

Special circumstances

While opting for two single life policies can deliver more value for money, joint life policies can still be favourable in some cases. Joint life cover for a business loan works perfectly well, as there is only one debt to clear and, once paid off, there is no requirement to take out further cover.

Additionally, Rob Harvey, independent protection expert at Drewberry, says a joint life policy may still be the most appropriate choice for some couples. “Even where there are children and daily living expenses to consider on top of a mortgage, it may make more sense to have a joint life policy that will both pay off the mortgage and leave a lump sum for the family,” he explains. 

“Whether the additional expense of taking out two separate policies is required or not will depend entirely on the clients in question.”

However, the arguments for joint life policies are increasingly limited – two single life policies offer greater flexibility, certainty and cover. 

In the situation where advisers recommend a joint life policy, they must ensure that consumers fully understand the ramifications of sharing their life insurance with another person.

 

BIG NUMBERS

1.3m

Number of life insurance policies sold in 2016 (Swiss Re, Term & Health Watch 2017)

£144,132

Average sum assured for life policies sold in 2016 (Swiss Re)

£394

Average annual premium for life policies sold in 2016 (Swiss Re)

12 years

Average length of a marriage in the UK (Office for National Statistics)

£1.3trn

Total mortgage debt in the UK in 2016(UK Finance)