Spouses usually share a bank account, a home, or even a business. How about sharing an insurance policy? There are good reasons to consider insurance coverage commonly known as joint last-to-die insurance, a single contract based on the lives of two or more individuals.
Why the need: This type of coverage makes sense when the individuals insured share a common liability that will only arise upon the death of the last person, usually a spouse. This typically involves loans, RRSPs, RRIFs, stock portfolios, business shares, vacation homes, farm land or any other capital property with imbedded tax liability. The common tax plan is to “roll” assets to the surviving spouse on death thus deferring the tax liability until the death of the surviving spouse. Tax-free proceeds from a joint last-to-die insurance policy can pay the tax liability that is triggered on the last death.
Aging generations traditionally invest in fixed-income products, and as a result need to balance a low rate of return with higher tax rates and possibly the sale of other assets for income. These events both increase today’s tax burden and ultimately erode the net estate you intend to leave. Putting a joint last-to-die insurance product in place may work better in this situation, if the survivor doesn’t immediately need the cash.
Single life coverage makes more sense when it is based on the life of one individual and provides funds on death to cover an immediate need such as income replacement.
Does joint insurance coverage cost more? The good news is that joint coverage is less expensive than purchasing single life coverage on either lives. This is because the Joint Life Expectancy for two individuals is longer than for a single person. Like single life coverage, that cost is fully guaranteed.
Real life applications: Consider a typical farm situation where mom and dad want to pass the family farm onto one child and would like to create fairness for the non-farming children. If the child working with the parents is going to get a multi-million dollar farm, there is no practical way to compensate the non-farming children equally and maintain the farm without something additional in place. Tax-free cash to each of the non-farming children on the last parent’s passing can provide an equitable way to do this.
This type of coverage can also be used to address many different types of needs which include the intergenerational transfer of wealth, charitable giving opportunities and other legacy planning objectives.
Take the time to sit down with a trusted advisor who can review these different strategies that utilize joint last-to-die coverage. You need to determine what your intentions are after you are gone, whether it be to equalize your estate or just ensure that your spouse is taken care of financially. Learn about all the different options available to ensure you build a financial plan that works best for you.
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