Life insurance payable on the second death? Not your second death. The second within your relationship.
The formula, in two words: two spouses take out life insurance together, the death benefit of which will only be paid upon the death of the last living spouse.
But who will be the beneficiary of the policy if both spouses are deceased? Generally their heirs, most often their children.
The objective is usually to reduce the tax impact on the estate.
“Once the second person dies, that’s when the policy’s death benefit is transferred to the beneficiaries, without question and without taxation,” describes Olivier Dubois, financial security advisor at De Champlain Financial Group.
The beauty of it is that it helps, in a certain sense, to protect the estate.
Olivier Dubois, financial security advisor at De Champlain Financial Group
A fiscal guardian angel, we would say.
Let’s give an example.
A (very) fictitious example
Prosper Richard and his wife Félicité Sanschagrin own a second home in Saint-Fortunat, on Lake Dodécagonal (between Lake Rond and Lake Carré).
Purchased for $50,000 in 1987, the chalet is now worth $550,000.
When they die, they want to leave it to their two precious daughters, Agathe and Perle. But the hand of the taxman will fall – heavily – on the estate of the last deceased.
Agathe and Perle will have to pay tax on the capital gain realized at the time of the second death. If the fair market value then reaches $650,000, the capital gain will be $600,000 (we’re simplifying a lot).
Each child will be taxed on their share of this gain, or $300,000. With an inclusion rate of 50% on the first $250,000 and 67% on the excess (as of June 25), that’s $158,500 that they will each have to add to their taxable income of the year. Assuming an effective tax rate of 39.5%, the tax bite would be $62,600.
To pay it off, they could remortgage the property, but will they have the budget available? Will they be forced to give up the chalet? To spare them the dilemma and the expense, Fortunat and Félicité, aged 65, have just taken out second-to-die life insurance of $200,000 for the benefit of their children. The couple’s monthly premium is $349.
On the death of the last spouse, each child will receive compensation of $100,000, tax-free. They will be able to pay the capital gains tax without any problem and keep the chalet.
That’s the principle.
Cheaper than another
“The advantage of life insurance on the second death is that it costs much less, when for example a couple wants to leave something to their children,” argues Olivier Dubois, financial security advisor at De Champlain Groupe financial. Let’s compare with two individual life insurance policies which total the same amount in death benefit.
