Joint last-to-die life insurance in Canada

Joint last-to-die life insurance covers two individuals, typically couples or business partners. It is an effective estate planning tool since it effectively helps preserve wealth and ensure assets are distributed and transferred smoothly. 

In this blog, we’ll look at what a joint last-to-die life insurance policy is, how it works, who it benefits, and more. 

What is joint last-to-die life insurance?

Joint last-to-die life insurance, also known as survivorship life insurance, covers two lives under one contract. Unlike single life policies, joint last-to-die life insurance pays out the death benefit only when both the insured individuals pass away. This deferred payment structure makes it an ideal and strategic tool for estate planning in Canada. 

Key features of joint last-to-die life insurance

Benefits of joint last-to-die life insurance in estate planning

Joint last-to-die life insurance is a powerful estate planning tool that can help with tax management, preservation of wealth, simplified estate distribution, and charitable giving. Let’s look at all of these benefits in more detail:

Tax efficiency and expense management with joint last-to-die life insurance

• Offsetting capital gains tax: The deemed disposition mechanism in Canada treats a deceased person’s assets—such as investments and real estate—as having been sold at a fair market value. This leads to considerable capital gains tax on an asset, especially if it has appreciated in value. The lump-sum tax-free death benefit from a joint last-to-die life insurance policy can be used to pay these taxes
• Covering probate fees: Probate is a legal process that validates a will, and can involve a substantial amount of fees that varies by province. Since joint last-to-die policies let policyholders choose a beneficiary, the death benefit bypasses the probate process. This means that the beneficiaries are not affected by probate and other administrative fees  

Wealth preservation and equalization with joint last-to-die policies

• Asset protection: As mentioned above, the death benefit from a joint last-to-die policy can be used to pay taxes and administrative costs without the need to sell all or parts of an estate to cover them. This ensures maximum wealth preservation for beneficiaries
• Equal distribution of wealth: Couples or common law partners with more than one beneficiary/heir can choose to distribute the death benefit from a joint last-to-die policy to offset any disparities

Joint last-to-die policy to simplify estate distribution 

• Since the death benefit from a joint last-to-die policy goes directly to the beneficiaries, bypassing probate, it speeds up the distribution process and avoids any legal delays

Enhanced flexibility with joint last-to-die cover

• Joint last-to-die policies can be easily integrated in other estate planning tools such as wills and trusts. For example, the death benefit can be placed in a trust that provides financial support to beneficiaries or funding to charitable organizations

How do joint last-to-die policies differ from other insurance plans?

Joint last-to-die policies differ from other insurance plans in terms of coverage options, the payout structure, and the benefits. Single-life policies cover one person and the death benefit is paid when the insured dies. Joint first-to-die covers two and pays out upon the first death. Joint last-to-die policies cover two individuals and pay out when both have passed away. 

Here are some more differences:

Individual life insurance:

• Flexibility: Can be customized and tailored to the preferences of an individual’s unique financial needs
• Cost: Can be more expensive than joint last-to-die policies since only one individual is insured and the insurance company will have to pay the death benefit sooner

Joint first-to-die life insurance:

• Usage: Unlike joint last-to-die policies, joint first-to-die plans provide immediate financial support to the surviving insured member. This is ideal for income replacement, paying off debts, and other immediate financial obligations

Individual, joint first-to-die, and joint last-to-die: comparison table

How does joint last-to-die life insurance work in Canada? 

A joint last-to-die life insurance policy needs a joint application by both the individuals who want to be insured under one contract. During the underwriting process, insurers assess the health and lifestyle of both individuals and check that they are both “insurable”. This means that pre-existing conditions may affect coverage and eligibility. 

Here’s a more detailed look at how joint last-to-die policies work in Canada:

• Application and underwriting: Requires a joint application by both individuals. The underwriting process looks at both individuals’ health—pre-existing conditions, age, lifestyle—can affect premiums
• Premium payments: Premiums continue until both insured individuals have died. This means the surviving policyholder must continue to pay premiums after the first death to maintain coverage
• Policy type: A joint last-to-die policy is more commonly issued as a permanent (whole life) plan, although term plans are also available with the same coverage
• Beneficiaries: In case of a couple, the children are the common beneficiaries, rather than the surviving spouse/partner. Business owners may choose to name their companies as the beneficiary

How does the survivorship clause in joint last-to-die life insurance policies work?

The survivorship clause is integral to a joint last-to-die life insurance policy especially in cases of simultaneous death. If both the insured members die at the same time, the death benefit is paid out after a certain time frame, usually 30 days. The survivorship clause is crucial to estate planning since it ensures that the death benefit is only paid out after both the insured policyholders have passed away. 

Are there any health requirements for individuals applying for joint last-to-die life insurance?

Yes, insurers look at the health and lifestyle of both individuals for a joint last-to-die policy. A closer age range and health profile can generally result in better premium rates. While pre-existing conditions, even the more critical ones such as cancer or heart issues, do not necessarily affect eligibility, they might increase the premiums. 

Cost of a joint last-to-die life insurance policy

The cost of a joint last-to-die life insurance policy depends on the age, health, and lifestyle of both the individuals. In some cases, high-risk jobs such as construction work, might also affect the premiums. 

Joint last-to-die policies are cheaper than individual plans, sometimes as much as 20-30% lower. This is because the insurer’s risk is reduced due to the delayed payout after the second death.

Cost of a whole life joint last-to-die insurance policy

How do premiums for joint last-to-die life insurance policies typically compare to individual policies?

Premiums for joint last-to-die life insurance policies are generally lower than individual plans. This is because of the deferred death benefit payout with joint last-to-die policies. The assumed probability of death with individual policies is higher—insurance companies have to pay out the death benefit when the sole policyholder passes away. With joint last-to-die policies, insurers have more time to pay out the death benefit. 

With joint last-to-die policies, a closer age range and similar health factors between the two applicants will typically lead to more favourable premiums. 

What are the tax implications of the death benefit from a joint last-to-die life insurance policy?

The death benefit of a joint last-to-die life insurance policy is received tax-free by the beneficiaries. The death benefit can be used to offset capital gains taxes, outstanding debts, and other estate liabilities, ensuring the estate is not diluted before being passed on to the beneficiaries. 

Can joint last-to-die life insurance be used to cover funeral expenses?

Joint last-to-die policies are designed for estate planning and are generally not used for immediate financial needs like funeral expenses. Since the death benefit is only paid out after the second insured passes away, the first insured’s funeral expenses cannot be covered by the policy. 

In some cases, a specific rider can be added to a joint last-to-die plan that offers a portion of the death benefit upon the first death as well. 

Who should consider joint last-to-die life insurance?

A joint last-to-die life insurance policy is beneficial for married couples, business owners, and high-net-worth individuals who want a long-term estate planning strategy.  

Here’s how joint last-to-die plans work for different groups of individuals:

• Married couples and common-law partners: Helps couples with a combined estate protect their legacy and ensure their assets go to their children and heirs without the burden of taxes, probate, and other expenses

• Business owners: Ideal for business partners who want to fund buy-sell agreements and ensure seamless business continuity during ownership transfer 
• High-net-worth individuals: Can be a strategic estate planning tool for high-net-worth individuals who have significant wealth and who want to ensure their assets are protected  

How to incorporate joint last-to-die life insurance into your estate plan?

To integrate a joint last-to-die life insurance policy into your estate plan you should review the value of your estate, set a coverage amount, and integrate your policy with other estate planning tools. Here’s a detailed look at these steps:

• Assess your estate’s value: Understand the current value of your estate, any tax obligations, or other financial considerations related to your estate
• Set a coverage amount: Your death benefit should match potential estate expenses to ensure maximum wealth protection
• Integrate with other tools: Integrating your joint last-to-die policy with other estate planning tools such as wills and trusts, will ensure your estate is not diluted by taxes or administrative costs before being passed on to your beneficiaries