Does life insurance beat investing to cover final taxes?

Q: My wife and I need a join last-to-die policy to offset about $400,000 in taxes. We have longevity on both sides of the family and expect we could be paying for the policy for 30 years or more. To cover inflation as well as a growing portfolio (we expect the portfolio will increase, not decrease over time) we will likely need to increase our coverage. My thoughts were that I would be better to invest the premiums myself as I feel the policy would be too expensive?

—Rudy

A: Rudy, the longer you live the more you contribute to any life insurance policy and the lower the return will be on the policy.

Last to die coverage is generally much more affordable than individual life insurance policies because the policies pay out farther into the future. That’s because last-to-die policies pay out on the death of the second of the two partners rather than as soon as one spouse dies, as an individual policy does.

Generally speaking, you will contribute a much lower amount than the eventual payout, but as mentioned, the longer you and your spouse live the more you will have contributed.

Regarding your need for growing coverage over time, the death benefit is paid out tax free and depending on the type of policy, you can design it so the death benefit increases, but this would mean contributing a higher premium and having extra money go to an investment account which would grow on a tax-sheltered basis and would be paid out tax free.

So the pros and cons of Joint Last-to-Die life insurance policy versus saving/investing the premiums yourself) can be summarized as follows:

Pros of Joint Last-to-Die Insurance for estate planning
-Less expensive than traditional forms of permanent life insurance.
-The death benefit is paid out tax-free.
-An increasing death benefit option is available where an extra amount can be invested growing tax sheltered and paying out tax-free

Cons of Joint Last-to-Die Insurance for estate planning
-You don’t have full control of your capital i.e. if you decide you don’t need it for estate planning you can’t use it for whatever purpose you need.
-The longer you and your spouse live the more money you contributed and the lower the return on this type of policy.
-If you and your spouse have significant health issues this type of policy may not be available or it will be much more expensive.

As for the cost of the Joint Last-to-Die Insurance, a $400,000 policy for a 65-year-old male non-smoker with a 65-year-old non-smoker spouse, the annual premium would vary between $7,756 for a policy with Desjardin up to $10,192 annually for a policy with The Manufacturers Life insurance Co. If the last spouse died after 10 years, you’d have paid $77,560 in premiums with Desjardin and about $101,925 in total premiums with Manufacturers Life. After 30 years of having the policy, you would have paid $232,680 with Desjardin and $$305,775 with Manufacturers Life.

Remember, life insurance payouts at death are tax-free. Still, it pays to visit an advisor and run some numbers regarding expected investment returns if you invest those same premiums yourself. You can then make a final decision with all the facts at hand.

Lorne Marr, is the founder of LSM Insurance, an independent Canadian Life Insurance Brokerage company in Markham, Ont.

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