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What is whole life insurance and how does it work in Canada? (2024)

SUMMARY

Whole life insurance is a type of permanent life insurance that covers you for your entire life. It can be used to help pay for final expenses like funeral costs or managing estate taxes after you pass away. Whole life coverage also gives you a cash value that increases your death benefit and that you can use in your lifetime. Some types are also called “participating,” and can pay you dividends in addition to the cash value.

IN THIS ARTICLE

If you’re the kind of person who likes to cut your cake and eat it too, whole life insurance could be your perfect financial solution. It combines the peace of mind of life insurance with investments that let you pocket some extra cash while you’re still around.

Think of this article as your easy guide to understanding what is whole life policy, how it works, and how you can best use it to your advantage. Let’s take a look.

What is whole life insurance?

Whole life insurance is a type of permanent insurance that covers you for your entire life and allows you to access a part of the death benefit as cash value during your life. Some policies also pay dividends, further helping you to grow your wealth over time.

It’s the perfect coverage for long-term needs such as estate planning or leaving an inheritance for your loved ones.

Also check out our quick video on Whole Life Insurance Explained below!

Whole life insurance can be used for:

  • Cover funeral expenses
  • Build wealth
  • Pay premiums
  • Support a family
  • Protect your children
  • Leave a legacy
  • Preserve an inheritance
  • Support a business
A whole life insurance policy can be used during your lifetime and can help benefit your beneficiaries after you pass away.
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How does whole life insurance work in Canada?

Whole life coverage works like this:

  • You pay a certain amount of money, called premiums, to an insurance company
  • The policy builds cash value that you can use during your life
  • When you die, the insurance company pays an agreed amount of money, called a death benefit, to any person or business you want. That person or business is called your beneficiary, and most people choose their loved ones
  • Your death benefit can potentially be even higher than the original amount with a whole life policy

What is cash value and cash surrender value?

Cash value and cash surrender value are both “living benefits” that you can access from your whole life policy while you are alive.

Cash value is the amount of money that builds in a whole life insurance policy through the investment component. You can access this in multiple ways but only when you’re alive.

Cash surrender value is the actual amount of money you get from cash value after fees if you cancel or surrender your whole life policy.

what is cash surrender value

What are the different types of whole life policy?

Permanent whole life insurance policies can either be:

Participating

    • Covers you for your entire life
    • Has a cash value component
    • Pays annual dividends
    • Has more growth potential
    • Has level premiums that don’t change
    • Guaranteed to pay out a death benefit
    • Can increase the death benefit amount

Non-participating

    • Covers you for your entire life
    • Has a cash value component
    • Has level premiums that don’t change
    • Guaranteed to pay out a death benefit
    • Does not pay dividends
    • Has limited growth potential

What are the advantages of whole life insurance?

The main benefits of whole life insurance Canada are:

  • Lifelong coverage – Your policy will never expire once premiums are paid
  • Cash value – Premium payments are reinvested and grow cash value that you can access during your lifetime by borrowing against it, using it as collateral, withdrawing it, or more
  • Dividends (participating policies only) – Annual dividend payments can be used to reinvest, withdraw, buy more insurance, or more
  • No market volatility – The investment component is managed by the insurance company and it does not fluctuate with the market
  • Guaranteed death benefit – Life insurance will pay out when you pass away no matter what
  • Stable, growing death benefit – Your death benefit or coverage amount can grow over time with cash value or dividends
  • Level premiums – The amount you pay will stay the same for the duration of the entire life insurance policy
  • Limited pay options – Your policy can be paid off in a short time frame so you don’t have to worry about it later

What are the disadvantages of whole life insurance?

The main disadvantages of whole life policies are:

  • Premiums can be expensive – Whole life policies can cost more than other types of life insurance
  • You can’t choose a coverage period – You cannot select coverage for just a set period; it can only last forever
  • Investment potential may not be as large as with other investments – Growth from a portfolio managed by the insurer will be moderate

How much does whole life insurance cost in Canada?

The cost of whole life insurance depends on personal factors like your age, sex, and health, and also on your policy’s details. Check the chart below for some sample quotes.

Whole Life Insurance Quotes in Canada (2024)

Age $100K Coverage – Non-Participating (Female) $100K Coverage – Participating (Female) $100K Coverage – Non-Participating (Male) $100K Coverage – Participating (Male)
20 $42/month $44/month $47/month $54/month
30 $57/month $63/month $65/month $75/month
40 $85/month $92/month $92/month $110/month
50 $127/month $138/month $149/month $164/month
60 $202/month $217/month $245/month $263/month
70 $376/month $376/month $462/month $444/month

*Quotes based on $500k in coverage on a life-pay plan. Quotes based on average prices from leading insurance companies in Canada.

What are the payment options for whole life policies?

You have several different ways and frequencies by which to pay your whole life premiums.

Frequency

  • Monthly premiums — you pay premiums regularly every month
  • Annual premiums — you pay premiums as a lump sum once a year. Some companies offer discounted rates if you pay yearly

Payment method

  • Life payments — you make regular premium payments for as long as you have the policy. This is the default type of payment
  • Limited payments — you pay higher premiums for the first several years of the policy to pay it off early and then you don’t pay anything else for the rest of your life. This is unique to permanent insurance policies
  • Additional payments — you can pay more into your policy to increase the death benefit and build cash value faster
  • Reduced paid-up payments — you use your cash value to pay lower premiums, but the full life insurance death benefit is also reduced
  • Premium offset — you can use your cash value to pay premiums, so you don’t have to pay out of pocket. Sometimes called “premium holiday”
  • Premium switching — you can change how you pay premiums, such as going from annual to monthly payments 

Case study: A whole life insurance example

Let’s look at how whole life coverage works in a case study. In this example we’ll look at John, a 30-year-old Canadian who’s thinking about estate planning. He wants a lifetime insurance policy so he can leave something behind for his family after he passes away.

The chart below shows his projected cash value over time.

Age: 30

Gender: Male

Policy type: Whole life (non-par)

Death benefit: $250,000

Annual premiums: $1,565

Payment type: Life pay (premiums paid every year for entire life)

Policyholder age Policy year Death benefit Annual premiums Projected cash value
30 Year 1 $250,000 $1,565/year $0
40 Year 10 $250,000 $1,565/year $6,210
50 Year 20 $250,000 $1,565/year $21,897
60 Year 30 $250,000 $1,565/year $48,825

 

*Figures from an insurance illustration for a Desjardins non-participating whole life insurance policy purchased through PolicyAdvisor.com for a 30-year-old male in normal health.

Remember, John can use the cash value from his policy to build up his savings while still making sure his family would have enough money to carry on when he’s no longer around.

What are the other types of life insurance I can get in Canada?

If you’re looking for alternatives to whole life insurance, these are the other types of life insurance that you can get in Canada:

  • Term life insurance
    A type of life insurance that lasts for a certain number of years, called a term. Usually inexpensive and great for short-term needs.
  • Term-to-100 life insurance
    A type of life insurance policy that covers you for your entire life, but does not have a cash value or investment component like whole life does.
  • Universal life insurance
    A type of permanent life insurance that gives the policyholder more control over the investment part of the policy.
  • Funeral insurance
    A type of permanent life insurance that is designed specifically to cover end-of-life expenses. Also called Final Expense Insurance.
  • No-medical life insurance
    A type of insurance coverage that does not require a medical exam, and can ask just a few or no health questions at all. Usually gives lifelong coverage but comes with a lot of downsides.

Learn more about the different types of life insurance in Canada

What’s the difference between universal and whole life insurance?

Universal and Whole are both types of permanent life policy. But one of the main differences between a universal policy and a whole life policy is that universal gives you more control over your investments. This means it has greater growth potential, but it’s also more risky.

Learn more about it in our article on Whole Life vs Universal Life Insurance.

Whole vs universal life insurance

Is whole life insurance a good investment?

We do not recommend buying life insurance exclusively as an investment strategy. Its purpose is to provide lifelong protection and financial security your family can rely on, not to provide capital gains.

The average rate of returns for whole life insurance varies, but is usually around 2-4% per year. This is not bad. But, if you’re only looking for an investment vehicle to generate high returns in a short amount of time, you would be better off with other options.

Learn more about whether life insurance is a good investment

Should I buy whole life insurance or put my money into savings?

If you’re wondering whether you should buy whole life insurance or put the money into savings, a whole life policy is a much safer bet. Here’s why:

  • Unexpected emergencies can arise and cause you to dip into savings
  • The death benefit payout your family receives is usually far greater than you would be able to save and far greater than you pay in premiums in that same amount of time
  • There are added tax advantages because the death benefit is paid out tax-free, so your family gets to hold onto more of the money

What happens if I surrender my whole insurance policy?

You can surrender your policy by ending it at any time. In that case you would get the cash surrender value and no longer have coverage. You may have some options to change your coverage into a policy with a lower death benefit, or to a term life policy.

But it depends on your provider — you should ask your insurance advisor about your options.

How soon can I cash out my whole life insurance policy?

It depends on your provider. Most Canadian companies will let you access your policy’s cash value on the anniversary after 5 or more years. This is whether you want to withdraw it, borrow against it, or access it any other way.

But you may want to wait. The longer you let whole life insurance cash value accumulate, the bigger the amount you can use and the more benefit you can have.

How much can I borrow from a whole life policy?

You can normally borrow up to 90% of your policy’s cash value if you want to take out a policy loan directly from your insurance provider. If you want to borrow from a bank or lender and just use your policy as loan collateral, you can borrow up to 100% of the premiums you paid.

How to access cash value

Speak with an advisor

If you’re not sure whether whole life coverage may be right for you, contact us! Our licensed insurance advisors are happy to assess your needs and help you compare options to make the most informed choice.

Book some time with us to see what your coverage options are and if whole life insurance coverage is right for you.

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FAQs about whole life insurance

Find the cheapest whole life insurance quotes online using our free quoting tool. Our platform scans the market in seconds to show you your best life insurance match instantly.

You an also check out our listing of current life insurance promotions in Canada. Or book a free consultation call with one of our licensed advisors.

It usually takes years to build up a substantial amount of cash value — anywhere from 10 years or more. You can also help speed things up by paying more into the policy.

Alternatively, some policies are made to help you build cash value as quickly as possible. UV Insurance Company is a great example of this with their Whole Life High Values permanent policy.

Yes, you can add life insurance riders to a whole life insurance policy. It just depends on what your insurance provider has available, but you can get:

  • Term rider
  • Child rider
  • Accidental death & dismemberment benefit rider
  • Guaranteed insurability rider
  • Return of premiums rider
  • Critical illness rider
  • Disability waiver of premiums rider
  • And more
What is the Extreme Disability Benefit Rider

It depends, but a medical exam is not needed in many cases. In general, if you’re a Canadian citizen or resident in good health and you’re getting under $500K in coverage, you will probably not be asked to take a medical exam.

The relationship between tax and whole life insurance can be looked at from a different angles. In general:

💸 Non-taxable

  • Death benefit payout
  • Dividends — if reinvested in the policy
  • Policy loans proceeds — if below the adjusted cost basis
  • Third-party collateral loans using the cash value

🏦 Taxable

  • Cash dividends
  • Policy withdrawals above the adjusted cost basis
  • Policy loans above the adjusted cost basis

There are many scenarios that can apply, so you should be sure to speak to a licensed insurance advisor or a tax professional to find out what applies to you.

No, you cannot use your insurance policy to become your own bank.

You may have seen this claim on social media platforms like TikTok, where some people claim you can use whole life insurance for “infinite banking.” But if something seems too good to be true, it usually is.

The concept of “infinite banking” does exist, but it’s very complicated. And it doesn’t work the way some catchy videos suggest.

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KEY TAKEAWAYS

  • Whole life insurance covers you for your entire life
  • Whole life insurance gives you a guaranteed and growing death benefit, and living benefits you can use during your lifetime
  • Premiums depend on personal and policy details

By Jason Reynold Goveas
Senior Insurance Advisor, LLQP
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