What Is Whole Life Insurance?
Whole life insurance is a type of life insurance that protects a person until they pass away. Sometimes called permanent life insurance, this type of policy has a guaranteed payout as long as the policyholder stays current on their premiums.
The key difference between whole life insurance and term life insurance is its coverage period. Term life insurance has an expiry date, which can be anywhere between 5 and 30 years. Meanwhile, whole life insurance has no expiry date since it protects you for the rest of your life.
Another feature of whole life insurance is its investment component. Part of your insurance premiums goes to your policy’s cash value, which you can then withdraw or borrow from during your lifetime. If you let your cash value grow, you may be able to add it to your death benefit to give extra money to your loved ones.
How Does Whole Life Insurance Work?
Whole life insurance works by providing coverage from the day protection kicks in up until your passing. When you pass, your beneficiaries can collect the tax-free death benefit to pay for your funeral expenses, settle debts, and replace the income you would’ve provided, among other purposes.
As with other insurance products, you need to pay a premium to keep a whole life policy’s protection active. Since whole life insurance is guaranteed to provide death benefits, its premiums are typically higher than term life insurance. Fortunately, whole life insurance has fixed premiums, which means you won’t see price increases as you age.
Different from term life insurance, premiums in a whole life policy don’t just keep your policy active. Your insurer reinvests part of your premiums to build the policy’s cash value. Once there’s enough money in your cash value component, you can withdraw or borrow against it if you ever need extra cash.
Understanding Cash Value
A whole life policy’s cash value or investment component makes it different from term life insurance. Your policy builds up cash value over time, and eventually, you can use it for multiple purposes.
How do you build your cash value and access the money stored inside? Let’s take a look. We’ll also go over common uses of your whole life policy’s cash value.
Your cash value builds as you make premium payments. The insurer uses a portion of your money for investments, and the returns go into the policy’s cash value. Most whole life policies have a guaranteed return rate, but each insurer has different investment strategies and return rates.
The most straightforward way to build cash value is to pay your premiums on time. Every time you pay, the insurer’s investments get bigger, which leads to more returns. However, there are two ways you can potentially build cash value faster:
- Pay your premiums in a lump sum to contribute even more money to your policy’s investments.
- Take a policy with higher interest rates to potentially earn more returns.
Note that your cash value investment returns might vary depending on market conditions. Examine your current financial condition and consult with your insurer to find the best way to build cash value.
Your cash value usually takes about five to ten years to build a significant amount of money. Once you have enough money stored in your policy, you can access it for various purposes.
But first, we need to cover how to access your cash value. Here are three ways you can access the money stored in your policy’s cash value:
- Withdrawals: You can directly withdraw money from your policy’s cash value. Depending on your insurer, you may have to pay withdrawal fees. Some insurers also reduce the policy’s death benefit if you withdraw from your cash value.
- Policy loans: Instead of withdrawing money from your policy outright, you can choose to take a loan. These loans usually have low interest rates and no collateral requirements. Since it’s a loan, you must repay it, with interest, later on.
- Surrendering your policy: Surrendering your policy ends your insurance coverage and gives you the entire cash value, minus surrender fees. Generally, your surrender fees get smaller the longer you have the policy.
Note that your cash value is tax-deferred, which means the money you cash out or withdraw from the policy may be subject to taxes. Check out our guide to the tax implications of insurance to learn more.
What can you use the money for once you access your policy’s cash value? Here are some common uses:
- Increase your death benefit: Some insurers allow you to use your cash value to boost your death benefit. This ensures any money you’ve accrued in the policy during your lifetime goes to your loved ones when you pass away.
- Pay insurance premiums: If you have enough money built up in your cash value, you can tap into it to pay your premiums. This is especially useful if you’re already retired or otherwise have limited income to pay insurance costs.
- Personal purposes: The money you loan or withdraw from your policy’s cash value is essentially yours. You can use it for any purpose you like, whether it’s going on a vacation or settling existing debts.
Is Whole Life Insurance Worth It?
Whole life insurance is worth it if you’re looking for lifelong insurance protection and don’t mind spending more money to get it. Whole life insurance is especially worth it if you:
Generally, people take term life insurance because they have a dependent that will eventually become self-sufficient. However, if you have a lifelong dependent, like a child with a disability, you may need to provide for them for the rest of their life. Whole life insurance guarantees your loved ones will have the money to take care of them, even in your absence.
If you’ve maxed out your RRSP and TFSA contributions, whole life insurance can be another place to put money towards your eventual retirement.
Whole life insurance can be a way to leave a financial legacy for your children. Your insurance payout can act as a trust fund to ensure they’re financially secure without you.
Investing in your policy’s cash value is a safe option if you’re financially conservative. The returns may not be as large as other investment vehicles, but your money is much safer.
Building cash value in your policy means you have a source of funds to draw from later if needed. You can do many things with a built-up cash value like add to your retirement savings or pay your child’s education costs.
What Are the Pros & Cons of Whole Life Insurance?
Each type of insurance product has its unique benefits and drawbacks. To help you determine whether whole life insurance is right for you, here’s a look at its pros and cons:
Pros of Whole Life Insurance
Cash value component
One of the largest appeals of whole life insurance is its cash value component. In addition to insurance protection, you get to grow this cash value and use it to pay your premiums, increase your death benefit, and for other personal purposes.
Fixed insurance costs
Whole life insurance premiums are usually fixed when you qualify for a policy. This means your premium costs will stay the same for the rest of your life, ensuring you won’t be surprised by sudden cost increases.
Forced savings vehicle
You’re “forced” to put money into your cash value because it’s part of your premium payments. This means you don’t have to worry about setting aside any money for investments, since your insurer’s already taking care of it for you.
As long as you stay current on insurance premiums, your beneficiaries are guaranteed to receive your death benefits when you pass. This death benefit is also tax-free, meaning your loved ones will get the entire payout without any cuts.
Lifelong insurance coverage
As the name implies, whole life insurance has no time limit. You don’t have to worry about renewing your policy since it stays in force until you pass away.
Stable investment returns
Insurers usually put your money into conservative investment vehicles, so your returns are generally more stable than if you invested in high-risk instruments.
Cons of Whole Life Insurance
Whole life insurance usually has higher premiums than term life insurance, which might make staying current with your payments harder.
You don’t have as much flexibility with whole life insurance since you can’t convert it into term life insurance if you decide you don’t need lifelong coverage. Contrast this with term life insurance, where you can convert your policy to get permanent coverage if you want to stay insured.
Low investment returns
On whole life insurance, your premiums generally go to low-risk, conservative investments. While returns are generally stable, your returns may be smaller than if you were to invest in higher-risk financial instruments.
There are a lot of moving parts to whole life insurance. You may have a harder time learning about your policy and how to make the most out of it.
Taxable cash value withdrawals
You can withdraw cash value from your policy for personal purposes, but that money is taxable.
Who Can Benefit From Whole Life Insurance?
Naturally, people who need lifelong insurance protection can benefit from whole life insurance. You’ll benefit the most from whole life insurance if you fall into one or more of these categories:
Cash value investing is stable and low-risk, which makes it perfect for conservative investors willing to play the long game. Your cash value builds up steadily without being too affected by market volatility. Plus, cash value investing is essentially on autopilot, since the insurer handles all the investment legwork.
HIgh-earners who have maxed out their traditional retirement investment accounts can use whole life insurance to build their retirement funds further.
People with lifelong dependents
Whole life insurance can help you take care of lifelong dependents like family members with disabilities. Whenever you pass away, your loved ones will receive money that ensures those dependents will receive the care they require in your absence.
People who want to leave a financial legacy
A whole life insurance policy can be a way to build a trust fund for your children. This way, you’ll provide money for your loved ones even in your absence.
Types of Whole Life Insurance
There are several types of whole life insurance in Canada, each with different features and stipulations. Here’s a look at the types of whole life insurance you can get from Canadian insurers:
Traditional Whole Life Insurance
Traditional whole life insurance is the basic type of whole life insurance. You receive insurance coverage for your entire life, and your premiums are locked when you qualify for the policy. You also accumulate cash value as you pay premiums.
Limited Payment Whole Life Insurance
With limited payment whole life insurance, you pay premiums for a certain time but get coverage for your entire life. For instance, you can pay premiums for 20 years but still get insurance coverage until you pass away. Since you only have to pay premiums for a limited time, premium payments are generally higher than traditional whole life insurance.
Limited payment whole life insurance is sometimes written as 10-pay, 15-pay, or 20-pay life insurance. The number before the “-pay” indicates how many years you need to pay insurance premiums.
Indexed Whole policies are best if you’re willing to take on some risk to potentially get higher investment returns on your premiums.
Single Premium Whole Life Insurance
In single premium whole life insurance, you’re only required to pay premiums once to gain lifetime insurance coverage. Naturally, your single payment will be much higher since you’re paying off the entire policy in one go.
Survivorship Life Insurance
Survivorship life insurance protects two people instead of one. It’s usually taken by couples or spouses and only provides death benefits after both policyholders pass away. Survivorship life insurance can be a way for parents to leave a financial legacy for their children or support lifelong dependents in their absence.
Modified Whole Life Insurance
Modified whole life insurance has lower premiums at the start of the policy, which means you can save money early on. However, your premiums will rise for the rest of your life after the introductory period. In most cases, the premium increase will offset your early savings, meaning you’ll pay more than a traditional permanent policy.
Variable Whole Life Insurance
Variable whole life insurance works similarly to a traditional whole life policy, where you build cash value as you make premium payments. However, variable whole life policyholders can choose where to invest money into, giving them more control over their investments. Depending on market conditions, you can build cash value faster or slower than traditional whole life policyholders.
Final Expense Insurance
Final expense insurance is whole life insurance with smaller payouts and lower premiums. The death benefit is smaller because it’s generally used to pay end-of-life costs like your medical bills and funeral expenses. Since this insurance is geared towards older people, it’s also easier to qualify for.
What Factors Affect The Cost Of Whole Life Insurance?
Insurance companies determine your premiums by assessing how much risk they’re taking to insure you. The riskier you are to insure, the higher your rates.
Here are several factors that insurers often use to determine your Canadian whole life insurance cost:
Younger people often land lower premiums because they’re less likely to have serious health issues. Conversely, older people may get higher rates because they’re more likely to develop health issues.
However, that doesn’t mean getting whole life insurance at a young age is always the right call. While you may lock in lower premiums if you get insurance early, you also need to make more premium payments if you want to keep insurance coverage until you pass.
Men usually get higher whole life insurance rates because they have lower life expectancy than women. Therefore, they’re statistically more likely to pass away earlier than women, making them riskier to insure.
Height and Weight
Height and weight matter when determining your whole life insurance costs because they determine your body mass index (BMI). Many insurers use your BMI to determine whether you’re overweight or obese, which are seen as risk factors.
Naturally, your personal health matters when determining insurance risk. You may see higher rates if you have conditions like heart disease, high blood pressure, or high cholesterol. If you have very serious health issues, you may be denied coverage altogether.
Family Health History
Even if you’re in good health, some medical issues can be hereditary. You’ll likely be asked questions about your family’s health condition and whether they’ve been diagnosed with serious issues or diseases.
Lifestyle and Career
Dangerous hobbies like extreme sports and skydiving increase your chances of injury or death, and that makes you riskier in the insurer’s eyes. To compensate for that risk, insurers raise your rates if you participate in potentially dangerous activities.
The same goes for your occupation. If you work in jobs with high mortality rates, your insurer may increase your rates to offset the risk.
Note that you shouldn’t lie about your hobbies or occupations in your insurance application. This is a form of insurance fraud and may result in the insurer declining your coverage.
Smoking and nicotine consumption increases your likelihood to develop serious medical conditions like lung cancer. Most insurers charge higher rates for smokers to make up for the extra risk they take.
Substance Abuse History
A history of alcoholism and drug use may cause insurers to raise your rates, since your risk of health issues or premature death may be higher. However, insurers usually review an applicant’s substance abuse history on a case-by-case basis. If you’ve only done drugs once years ago, you may still get insurance coverage, albeit at a higher rate. However, frequent drug users often get denied coverage altogether.
Having a criminal record will likely affect your life insurance rates. Whether it’s vehicle-related offences or something more serious, having criminal acts on your record may raise your premiums or lead to insurers declining coverage. Different insurers treat criminal records differently, so you may find more lenient companies that can sell you insurance at reasonable prices.
Policy Coverage Amount
Getting a higher policy face value means you can leave more money behind when you pass away. However, a higher coverage amount means you need to pay higher insurance premiums.
Policy Payment Period
Not all whole life insurance policies require you to pay premiums until you pass away. Limited payment and single premium policies have shorter payment periods but generally have larger premium payments.
Whole Life vs Term Life Insurance
Whole life insurance and term life insurance have their purposes. People who take whole life policies do so to get lifelong insurance protection and invest their money. Meanwhile, people who get term life insurance only require coverage for a limited time and want to save money.
Check out our comparison between whole life insurance and term life insurance to learn which one is best for you.
Whole Life vs Universal Life Insurance
Whole life insurance and universal life insurance provide lifelong coverage, but there are some key differences between them. Universal life insurance policyholders have more control over their cash value investments, which means they can earn or lose more money, depending on market conditions. You can also adjust the death benefit on a universal policy to modify your premiums.
Learn more about the differences between whole life insurance and universal life insurance to help you pick the right policy type.
How Much Does Whole Life Insurance Cost in Canada?
Whole life insurance costs in Canada differ depending on your personal risk factors. That means insurance premiums are tailored to every person, and you’ll get different quotes from every life insurance company.
Since getting generic quotes for whole life insurance isn’t viable, here are some sample insurance quotes taken in July 2023:
|Policyholder profile||Coverage amount||Annual price|
|40-year-old non-smoking female||$150,000||$1,133|
|50-year-old non-smoking male||$300,000||$4,063|
|35-year-old non-smoking male||$500,000||$3,291|
Use MyChoice to compare whole life insurance quotes between insurers and find the best deal for you.
Can you convert term life insurance to whole life?
You can convert term life insurance to whole life insurance in Canada. Converting your policy usually means you don’t have to go through a medical exam or re-qualify for a new insurance policy.
How long does it take for whole life insurance to build cash value?
A whole life insurance policy usually takes around 10 to 15 years to accumulate substantial cash value. However, limited pay life insurance policies can build cash value faster because you’re accelerating the payment schedule.
Is whole life insurance tax deductible?
Whole life insurance premium payments aren’t tax-deductible. Your beneficiaries don’t need to pay taxes on your death benefit, either. However, you may need to pay taxes on the money you withdraw from your policy’s cash value.
Check out our guide to the tax implications of life insurance to learn more.
Does whole life insurance expire?
Whole life insurance doesn’t expire as long as you pay your premiums. Whenever you pass away while your policy coverage is active, your beneficiaries will receive the death benefit.
Can I cash in my whole life insurance policy?
You can cash in your whole life insurance policy by surrendering it. You’ll get your entire cash value minus surrender fees, but you’re also relinquishing your death benefit.
If you don’t want to cash in the entire policy, you can instead withdraw money from your cash value or borrow against it.
Is a whole life insurance policy a good investment?
A whole life insurance policy is a good investment if you’re looking for a low-risk, conservative investment vehicle to go along with your insurance coverage. Generally, whole life insurance is a good investment if you’ve maxed out all your other retirement accounts or want to ensure a lifelong dependent will be taken care of in your absence.
Read our article about whether whole life insurance is a good investment to see if it’s right for you.
What is final expense whole life insurance?
Final expense whole life insurance is a whole life policy with smaller death benefits and lower premiums. It’s usually bought by older people to ensure they have enough money to pay final expenses like funeral costs and medical bills.
Can I borrow against a whole life insurance policy?
You can borrow against a whole life insurance policy. Life insurance policy loans are tax-free and have low interest, but you still need to repay the loan. If you don’t repay the loan before passing away, your beneficiaries will receive a smaller death benefit.
Can I cancel my whole life insurance?
You can cancel your whole life insurance if needed. Your options when you want to cancel your whole life insurance policy are:
• Stop paying premiums and use the cash value to cover premium payments until it runs out.
• Convert your policy into a reduced paid-up life insurance policy with a smaller death benefit.
• Surrender the policy and receive its cash value minus surrender fees.
What is a 20-pay whole life policy?
A 20-pay whole life policy is whole life insurance where you pay premiums over 20 years. Once you’ve successfully made 20 years’ worth of payment, you don’t have to pay premiums for the rest of your life. Note that your premium payments are likely higher than regular whole life insurance since you’re compressing decades of payments into a shorter period.
What is a 10-pay whole life policy?
Similar to a 20-pay policy, a 10-pay whole life policy lets you pay off the entire policy in 10 years. 10 years is a relatively short time, so your premium payments may be even higher than 20 pay policies.
How do I find cheap whole life insurance?
Finding cheap whole life insurance is tough, but you can find affordable policies by comparing quotes between insurers. Use MyChoice to browse insurance companies and find the insurance deals that fit your budget and protection needs.