Second to die life insurance in Canada is a policy that pays upon the second person’s death (out of two people). It’s not commonly used or appropriate for most families, instead it’s used in specific, mostly tax-related and estate planning situations.

 Uses of second to die life insurance

Probably the most common use for second to die life insurance is for estate planning purposes – in particular, payment of taxes that are due upon the second spouse’s death. An obvious example of this would be the family cottage. If two grandparents have a cottage that they want passed down to their children and grandchildren, when the first grandparent passes, the cottage will pass to the surviving grandparent, generally without tax implications.

However when the second grandparent passes, taxes are generally triggered. And these taxes are not inconsequential – they can be a significant percentage of the value of the cottage. 

This means that when the second grandparent passes, their children and grandchildren must come up with a lot of money to pay these taxes – and the CRA isn’t known for waiting forever to get paid. Where is that money going to come from?

And the answer of course, is from a second to die life insurance policy. An estimate of the amount of taxes is determined and a second to die life insurance policy is purchased on both grandparents for that amount. Then when the second grandparent passes, the government demands it’s taxes, the life insurance policy pays out, and the beneficiaries simply use that money to pay the taxes – and now the cottage remains in the family instead of having to be sold (Estate taxes are the biggest reason cottages go for sale in the Muskokas in Ontario, and probably the rest of Canada as well).

The other less common reason for second to die life insurance is called estate creation. If the grandparents want to leave a sum of money or an ‘estate’ to their children or grandchildren, a second to die life insurance policy can achieve that. While there may be cash in the estate already to accomplish this, a second to die life insurance policy has a number of benefits over that method. First, life insurance pays out quickly – often within a week of the full claim being submitted to the life insurance company. By contrast, an estate can take a year or two to settle and pay out the beneficiary. Secondly, there’s no taxes on life insurance (and there likely will be within an estate). If a second to die policy has a coverage of $50,000, then the beneficiaries receive the full $50,000 with no further tax filings or considerations. Next, the money is guaranteed if the policy is in force. Estates can be subject to taxes that vary over time, being contested, and wills – life insurance has no such considerations and many people prefer the guarantees offered byh life insurance. And lastly, life insurance benefits are paid in a private fashion. This means you can provide a life insurance payout that no one is aware of – the life insurance company will simply pay the beneficiary and due to privacy laws won’t disclose who got paid, or by how much. By contrast, estates that get probated become a matter of public record. So a life insurance policy can also avoid strife and conflict in the event of your death.

Probably the most common use for second to die life insurance is for estate planning purposes – in particular, payment of taxes that are due upon the second spouse’s death. An obvious example of this would be the family cottage. If two grandparents have a cottage that they want passed down to their children and grandchildren, when the first grandparent passes, the cottage will pass to the surviving grandparent, generally without tax implications.