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What's the point of joint last-to-die life insurance?

A joint last-to-die life insurance policy will make sure you or your loved one is provided with financial security in the event of an unexpected death.

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When it comes to life insurance, conventional thinking says you need low-cost term life insurance when you have a young family or mortgage. An alternative is permanent life insurance, which lasts as long as you live but is more expensive up front.

But there are other options as well. If you have a partner or spouse, your life insurance needs are intertwined and your coverage choices affect each other. That’s why joint life insurance exists, just like joint bank accounts and joint mortgages. There are two main types of joint life insurance, including joint last-to-die coverage. So, what’s the point of joint last-to-die life insurance and when does it make sense to consider it?

What is joint last-to-die life insurance?

Joint last-to-die life insurance policy is a form of joint life insurance that covers the lives to two people, usually partners. It pays out the death benefit only after both people die. This is different from a joint first-to-die life insurance policy, which pays the death benefit when just one of the two people die, generally to the surviving person.

A key feature of joint last-to-die life insurance is that it’s a single policy, rather than two policies combined, which are called combined policies. The underwriting process takes into account both lives insured, rather than insuring each life separately.

Tax liabilities on death: a primer

To understand the point of joint last-to-die life insurance, it helps to have a basic understanding of the tax implications of your death. When a person dies in Canada, they are considered to have ‘disposed’ of all their worldly possessions at market value. As a result, capital gains from investments – like property or shares – will have a tax bill due on them. Their estate will be required to submit a final tax return that declares income and pays this tax bill.

One of the purposes of life insurance coverage is to provide funds to pay this bill without having to sell assets, like cottages or the family home. That way, the deceased’s family can inheret these assets in full. One exception to this rule is for ‘spousal transfer’. If there is a surviving spouse or common-law partner, they can take ownership of the deceased’s assets in full, without capital gains being taxed.

Why not get two separate policies?

Rather than taking out joint coverage, you and your partner could have separate life insurance policies. If one of you died, a tax-free death benefit would be paid to the other. Thanks to spousal transfer laws, there would be no end-of-life taxation levied on the deceased’s estate. As such, the death benefit doesn’t need to pay a tax bill, and can be used or saved until the death of the surviving partner. When the surviving partner passed away, their life insurance coverage would be used to pay any tax liabilities of the estate.

This strategy can work, but the surviving partner would need to have coverage large enough to cover the tax bill of the combined estate. This could be significant, especially if they live a long time. Because life insurance death benefits generally don’t increase over time, there’s a risk the surviving partner’s policy may not be large enough. They could get a new policy after the death of their partner, but being older will make premiums more expensive.

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Why not get two separate policies?

Rather than taking out joint coverage, you and your partner could have separate life insurance policies. If one of you died, a tax-free death benefit would be paid to the other. Thanks to spousal transfer laws, there would be no end-of-life taxation levied on the deceased’s estate. As such, the death benefit doesn’t need to pay a tax bill, and can be used or saved until the death of the surviving partner. When the surviving partner passed away, their life insurance coverage would be used to pay any tax liabilities of the estate.

This strategy can work, but the surviving partner would need to have coverage large enough to cover the tax bill of the combined estate. This could be significant, especially if they live a long time. Because life insurance death benefits generally don’t increase over time, there’s a risk the surviving partner’s policy may not be large enough. They could get a new policy after the death of their partner, but being older will make premiums more expensive.

Advantages of joint last-to-die life insurance

With joint-last-to-die coverage, the death benefit is deferred until the time of the second (or ‘last’) death. Years or decades could pass between the two deaths. There are several advantages of this arrangement:

  • Tax liabilities on death: With a joint last-to-die policy, you can set your death benefit to the needs of your combined estate when you initially take out the policy. This means the surviving partner won’t have to adjust or add life insurance coverage after the first partner dies, as they would with separate polices. Life insurance is cheaper when you’re younger, so this approach would typically result in lower premiums.
  • Lower premiums: The premiums for a joint last-to-die policy are also cheaper than taking out two separate polices. As well as saving on administration fees, the death benefit is less likely to pay out, as it requires two people to die. That reduces the risk to the insurance company, and hence your premiums.

Disadvantages of joint last-to-die life insurance

As with everything, there are pros and cons to this approach. Here are some of the disadvantages, or caveats, for joint last-to-die policies:

  • Only one death benefit: Joint last-to-die life insurance doesn’t provide any benfit after the first partner dies. This can be a problem, as the loss of a partner is perhaps the worst experience someone can experience. Even a small payout to cover funeral expenses can make a big difference. A work-around here is to purchase a small joint first-to-die policy in addition to your main policy. This extra policy guarantees that if either of you were to die, the survivor would have a small death benefit to help them through the experience.
  • Changes to the policy: For a policy to be truly worthwhile, it needs to be sustainable. There’s a risk the surviving spouse might cancel the policy, perhaps due to pressure from family or lack of cash flow. A solution is to purchase a policy that becomes fully paid up at the time of the first death. In this situation the coverage can’t lapse, and there’s no reason to cancel it.
  • Size of estate: An important element of taking out joint last-to-die life insurance is estimating your tax bill when both you and your partner die. Because this number can change, sometimes dramatically, a joint policy with a set benefit might not be enough to cover the eventual liability. Taking out additional term coverage is an option, but only until you can no longer be insured around age 75. A better option could be a permanent or universal life insurance policy, which provides additional flexibility for this kind of situation. However, these policies are complicated, and aren’t right for everyone. To find out if this is the right option for you, get a life insurance quote and speak to a broker about your specific circumstances.

The bottom line

Joint last-to-die life insurance is a useful product that can increase the power and affordability of life insurance for you and your partner. However, it’s effectiveness depends on your finances and life expectancy. Universal life insurance might be a better option.

To decide what’s best for you, the best thing you can do is get a quote and speak to a life insurance broker about your needs.

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