What’s the Point of Joint Last-to-Die Life Insurance?

Matt Hands
by Matt Hands May 7, 2017 / No Comments

Conventional thinking says you need low-cost term life insurance when you have a young family or a mortgage. On the other hand, permanent life insurance, which lasts as long as you live, costs more at the beginning but is less expensive later.

Unconventional thinking

Unconventional thinking says permanent life insurance matters because your assets will grow and result in a large tax liability at death. Life insurance is often the cheapest way to get the cash to pay the bill. That leaves a larger legacy for your beneficiaries.

If you’re married, assets often transfer at death to the surviving spouse tax-free. Tax saved? Not really. Tax is merely deferred until the surviving spouse dies. That’s precisely when the joint last-to-die (JLTD) death benefit gets paid tax-free.

Why not get two separate policies?

You and your spouse could have separate life insurance policies. When the first spouse dies, a tax-free death benefit gets paid. This money can be saved until the death of the surviving spouse. The combined death benefits then pay the ultimate taxes.

This strategy works, but is more expensive because a death claim will occur sooner.

The advantage of JLTD

With JLTD, the death benefit is deferred until the time of the second (or “last”) death. Years or decades could pass between the two deaths. That reduces the risk to the insurance company, and hence your premiums.

There is a risk, though. The surviving spouse might cancel the life insurance, perhaps due to pressure from family members who don’t understand estate tax planning. There’s a solution: JLTD life insurance is available with charges stopping at the time of the first death. The coverage can’t lapse, and there’s no reason to cancel it.

An example

Suppose that:

  • Two spouses (male and female) are both healthy nonsmokers age 65, and
  • Their estimated tax bill at the time of the second death is $500,000

Here are monthly premiums:

  • Single life policies of $250,000 each: $1,227 ($650 for him plus $577 for her)
  • JLTD charges to the second death: $853
  • JLTD charges to the first death: $1,347

These figures are as of early 2017 and will change. The goal is to show you the relative differences. Your advisor can get you premiums for your unique situation.

If you’re unconventional and understand the value of permanent life insurance, you can save with the joint last-to-die option.

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