Last week, when we mentioned that life insurance can serve a certain need in retirement, we specifically noted the use of permanent insurance. Since all term policies expire at age 80 or 85, they cannot be relied upon to pay out a death benefit. Therefore, a permanent policy must be used to ensure that the funds will be available when needed. Many of the estate planning goals do not require a benefit to be paid on each death. Instead, the goals can be achieved by having a single death benefit paid on the last survivor’s death. An effective and relatively inexpensive life insurance policy that covers two people but only pays on the last survivor’s death is called joint last-to-die life insurance.
Usage of joint last-to-die life insurance
Joint last-to-die coverage is an essential part of estate planning. The first situation where it can be used is to pay off the tax liability on the last survivor’s death. From an earlier post, we mentioned that the Income Tax Act allows a deceased spouse to pass his assets on to his spouse on a tax-free rollover basis. The tax liability is then deferred until the surviving spouse also passes away. At this point, all the property under the surviving spouse’s name is deemed to be disposed of at the fair market value, triggering a capital gain. Assets that may have accumulated a large capital gain include investments such as stocks, bonds, mutual funds, the family cottage and shares of a small business. Half of the gain is taxable and will be added to income in the year of death. In addition to capital gains, the full value of the RRSP/RRIF will also be treated as income in the year of death if there are no qualified beneficiaries to receive the proceeds.
When these assets become taxable all at once, it can bump up the marginal tax rate, resulting in a significant tax bill. A joint last-to-die policy can be designed to match the tax liability, and is a perfect solution because the funds are available exactly when they are needed, upon the second death.
A joint last-to-die policy can also be used to create a legacy. If you do not have a sizeable estate but would still like to leave some money to your children and grandchildren, a joint last-to-die policy is a cost effective method of doing so. This includes using life insurance for charitable donations, which creates a tax credit that can be used to offset any tax liability.
Another use of joint last-to-die life insurance is when employing the insured annuity strategy. An insured annuity can enhance your retirement income, while still leaving an inheritance for your beneficiaries.
In order to do a complete analysis of the usefulness of a joint last-to-die policy, a premium comparison must be made between it and two individual policies. After all, it wouldn’t make sense to purchase a joint last-to-die policy if two individual policies can pay twice and have a lower premium.
In determining the cost of a joint last-to-die policy, the ages of the two insured are used to generate a single equivalent age. For example, a 65 year old couple will have a single equivalent age of a 58 year old male. The premium for the joint last-to-die policy will therefore be equivalent to a policy for a 58 year old male. The single equivalent age varies with every insurance company, so it’s important to have an advisor shop for the lowest single equivalent age, which should lead to the lowest premium.
|Single equivalent age||58 year old male||68 year old male||78 year old male|
|Joint last-to-die premium (A)||$186.71||$337.16||$704.61|
|Male premium (B)||$277.03||$535.24||$1,345.56|
|Female premium (C)||$245.87||$461.46||$995.06|
|Total premium of male and female (B+C)||$522.90||$996.70||$2,340.62|
|Premium difference between |
JLTD and two individual policies (B+C-A)
As you can see, joint last-to-die is much less expensive than two individual policies, since it only pays once instead of twice. Also, it only pays on the last survivor’s death, so both members of a couple will have to pass away before the insurance company pays a death benefit.
If you prefer to have a shorter premium paying period, some policies are paid up upon the death of the first person. Keep in mind that because the premium paying period is shorter, you will have to make up for the difference with higher monthly payments.
Knowing what type of life insurance policy to use depends on your estate planning goals. Since using a joint last-to-die life insurance policy can accomplish all the estate planning goals listed above, it’s safe to say that it is a better option than purchasing two separate individual policies, especially considering the difference in cost.
1. Quote from Industrial Alliance. Rates are current as of October, 2014.