Types of Life Insurance
Where is Life Insurance most often used?
There are two types of life insurance, Term Insurance and Permanent Insurance, both of which are detailed in following sections.
Single life and Joint life Policies
Both term and permanent life insurance policy may be issued as a single life or joint life policy.
A single life policy insures the life of one person and the death benefit will be paid out on the death of that insured.
A joint policy can either be a joint 1st to die or joint 2nd to die. Joint policies insure two individuals, typically husband and wife. The most common type of joint policy is a joint 2nd-to-die policy, which is to reflect the timing when the estate tax liability will be due in those situations where a spousal trust is being used and as such the capital gains tax liability will not be payable until the second to die.
There are pros and cons to using a joint 2nd-to-die policy. One positive aspect is its associated premium will be lower than for a single life policy with the same face amount, since the projected joint life expectancy of two individuals is longer than that of a single person. However, one of the problems with a joint 2nd-to-die policy is that it cannot be easily “unwound” in the event of a marriage breakdown. For example, if a husband and wife in their 40’s or 50’s establish a spousal trust and use a joint 2nd-to-die policy to cover the projected estate tax liability, then separate 10 years later, in all likelihood the spousal trust will be eliminated and a new trust will be established. The life insurance however cannot be unwound. As such, caution should be exercised when using a joint policy.