Usually, the death benefit from a last-to-die life insurance policy is intended to go to the children, a charity or pay taxes owed after both spouses pass away.
In the U.S. there is a marital deduction permitting you to leave an unlimited amount of assets to your surviving spouse with no taxes payable at your death. Those assets then become part of the estate of the spouse and if it includes a second to die life insurance polciy it could help pay any taxes. In Canada, there is more lenient tax treatment.
There are also tax ramifications for small businesses, which is why business partners also purchase last-to-die policies.
THE REASON TO BUY LAST TO DIE LIFE INSURANCE POLICIES
With a last-to-die life insurance policy your beneficiaries can pay debts with the proceeds of your policy, so they won't be forced to sell your house or liquidate assets to pay the bill.
A last-to-die life insurance policy can help to construct a financial plan reducing the tax burden of wealthy individuals by creating trusts and using last-to-die life insurance as part of the estate-planning process.
ADVANTAGES TO LAST TO DIE LIFE INSURANCE POLICIES
1. Less expensive. Last-to-die life insurance is usually less expensive than life insurance but depends on the blend of the ages. The premium is based upon the joint life expectancy.
2. Estate Preservation. A last-to-die policy appeals to individuals who feel strongly about preserving their estates with the life insurance paying the taxes.
3. Easier to buy. It's easier to qualify for a last-to-die policy than for individual life insurance. Since both insured people must die before the benefit is payable, the insurance company is less concerned that one of them might not be in good health.
* Builds your estate. In some cases, last-to-die life insurance is marketed as a way to build an estate, not just insulate it from taxes. Much like individual life insurance, the death benefit of a last-to-die policy can ensure that certain people receive money, even if you spend every nickel.
4. Last-to-die life insurance might make sense for people who don't have a lot of money but want to leave an estate for their children.
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