What is Last-to-Die Insurance?

BY: ANDREW STEWART

Part of my job as an advisor is to help people who are looking to combine the benefits of a properly designed permanent life insurance policy with an estate plan. The benefit is an asset protection plan that builds wealth and leaves a lasting legacy for generations to come. One such tool to accomplish this goal is through the use of a Joint Last-to-Die Life Insurance Policy.

Joint Last-to-Die Life Insurance pays out a tax-free benefit that pays out upon the death of both insured parties. Typically this type of joint insurance is on a husband and wife, and the policy death benefit is paid only after both die. However, it is possible to insure more than two people, say for example in the case of some key employees. In such a case, the joint insurance policy would pay a death benefit after the last insured dies. If you are new to this type of permanent life insurance, it may seem a little counter-intuitive to only pay after BOTH people have died. And honestly, it’s true that in many situations this type of insurance is not the most suitable. When you have spent your entire life working hard and building up a sizable estate, you may want to let that tradition grow. You may have children or grandchildren that you would like to leave some money. With this type of policy, you can do just that. You can also leave insurance benefits to your favourite charity or any other person of your choice.

Who may need a Joint Last-to-Die Life Insurance?

If you and your spouse have accumulated assets over the years and could have large capital gain values. Investments such as bonds, mutual funds, stocks and investment properties, plus any business shares you may own, could all be taxable. The value of each will be added to the total income of the deceased and hit with future tax liabilities.

How much does a Last-to-Die Policy Cost?

Last-to-die policies are considered a lot less expensive than policies on a single life because an insurance company can spread the mortality cost over two lives, and in most cases, over a longer period of time.

Let me give you an example to make it clearer. This example happens to be a very high benefit and premium, but the principle is the same regardless of the numbers used. A husband and wife both age 65 years of age are insured for $2 million individually via a Participating Whole Life insurance policy. The premium payments are roughly $96,000 and $90,000 annually. It’s a high premium, but they both have a guaranteed $2+ million death benefit due to cash value growth and dividends buying more insurance for them. The combined premium for the two is a whopping $186,000 annually! Very few people can afford this kind of insurance. For the same husband and wife to purchase a last-to-die insurance for $2 million, the policy premium was roughly $120,000 annually.

In many situations, the children of elderly parents split the cost so as to mitigate the cost while securing a rather substantial death benefit. Some families choose to do this sort of thing in order to create a substantial estate for all the beneficiaries involved. Also, there might be a need for specific special needs planning with life insurance in order that a child with special needs is protected financially upon the death of both parents.

Some cons of Last-to-Die Policies

It is probably obvious; the major con is that there isn’t any death benefit until both insured parties have passed away. This is not the financial tool to safeguard your income for your spouse, and it could actually be a substantial burden on your spouse if the surviving spouse has an impaired ability to pay the premiums.

Marital changes could have impact. It may seem like an impossibility when the policy was put in place, but life happens and marital changes may occur. If they do, the policy is not going to change, so you may want to keep that in mind.

Do your research and talk to a licensed advisor to see if it’s right for you.