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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 insurance also gives you a cash value 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.

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

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What is whole life insurance?

Whole life insurance is a type of permanent insurance that covers you for your entire life. When you die, the insurance company makes a payout to your loved ones.  They can use this payout for things like paying for your funeral or estate taxes, or anything else they need.

Some whole life policies also come with an investment component that builds cash value over time. You can use cash value during your lifetime or let it add to the death benefit after you’ve passed away. Plus, some policies pay dividends on top of cash value, giving you even more options to build wealth to use now.

People often use “whole life insurance” when they’re talking about permanent life insurance policies. But whole life is just the most common type of permanent insurance. There are other permanent life options too. You can learn more about that in our guide to permanent policies.

Check out our review of the Best Whole Life Insurance Canada

How does whole life insurance work in Canada?

With whole life insurance, you pay a certain amount of money, called a premium, to an insurance company. This premium stays the same for however long you have the policy.

When you pass away, anyone you choose will receive the life insurance payout we mentioned earlier. This is a lump sum, tax-free payment that life companies will only give out once.

Let’s look at how some of the key factors of whole life insurance work.

You can make whole life premium payments on a monthly or an annual basis. Some companies give discounts if you pay yearly, so you could save up to 8%.

Unlike with term policies, you can pay off whole life premiums early with an option called “limited pay.” This is just like how it sounds: you pay for a limited time and you get to keep your policy forever.

Companies normally let you pay for 8, 10, 15, or 20 years. Or up until you turn 65. But this can be an expensive option for some. So, you can pay the normal way if you want, too.

We talk more about whole life insurance premiums and show you some figures in the section on cost in this article.

When you pay your premiums for your whole life insurance policy, part of that money is used to cover the cost to insure you. Another part is invested by the insurance company. The income they generate from investing your insurance payments is given back to you as cash value or dividends.

Think of cash value as a savings account that is managed by your insurer. You can access your whole life policy’s cash value throughout your lifetime.

How much the death benefit will be is usually the amount of coverage you choose when you first get your policy. But with whole life insurance, it can be more — or less — depending on your cash value and any dividends.

For all policies, you start with a base amount of coverage. For example, $100,000. But your beneficiaries aren’t always guaranteed to get that exact amount.

If you borrow against your cash value and don’t pay it back, you could have a lower death benefit. Life companies would deduct from your death benefit to pay back the loan. For example, your beneficiaries may only get $70K even though your original policy coverage amount was $100K.

On the other hand, you can put your policy dividends back towards your coverage. This could give you a higher death benefit value over time. For example, your beneficiaries could get $200K even though your original policy coverage amount was $200K.

Key features of whole life insurance

Some of the key features that distinguish whole life policies from term life policies include:

  • Lifelong protection
    As long as you pay your insurance premiums, you will have coverage for life. This is unlike term insurance, which only lasts for a specific number of years.
  • Investment component
    Whole life policies build cash value by the insurance company investing the premiums you pay. This is automatic and included as part of all policies. Some policies also give you dividends. You can use cash value and dividends to pay premiums, reinvest, borrow, and more.
  • Guaranteed death benefit
    With this whole life, the insurance company has to make a payout, called the “death benefit.” Compare this to term life insurance, where someone could outlive their policy and the company wouldn’t have to pay anything.
  • Limited pay options
    Whole insurance lets you pay the entire cost of your premiums early if you want to. This premium payment option is called “limited pay.” Your policy lasts the rest of your life, but you could pay an agreed amount off in a certain time frame and still keep your policy until you die. For example, you could set a payment period of 8-20 years, or stop paying when you reach retirement age.
WHAT IS
WHOLE LIFE INSURANCE?
Whole life insurance is a type of insurance policy that lasts for your entire life.

Whole life policies provide your beneficiaries with a tax-free death benefit, plus they have a built-in investment component that generates cash value you can use in your lifetime. Some policies also pay dividends.

Most people get whole life insurance to cover long-term needs like paying final expenses or managing future estate taxes.

Question mark

What are the different types of whole life insurance policies?

There are two main types of whole life policies: participating and non-participating. The main difference between them is that a participating policy pays annual dividends but a non-participating policy does not.

Participating whole life insurance

A participating insurance policy has an investment portfolio that is managed by the insurance company. If that investment gets any returns, you will be paid the dividends.

Normally, dividends are paid out every year. They can be given to you as cash, or you can reinvest them into the policy. If you choose to reinvest your dividends, you will not be charged any tax on them.

There’s another benefit to reinvesting your dividends. It can increase your entire life insurance death benefit value, which can then be left for your family or be used to leave a legacy once you pass away.

Participating life insurance is usually more expensive than non-participating because it pays dividends and gives you the option to increase your death benefit. Insurance companies look at how much they expect the investments to get back when they decide how much to charge you for this kind of whole life policy.

Non-participating whole life insurance

Non-participating life insurance is a whole life policy that gives you the basics. It still:

  • Covers you for your entire lifetime
  • Has a cash value component
  • Has level premiums that don’t change
  • Is guaranteed to pay out a death benefit

But it does not:

  • Have an investment account
  • Pay dividends
Learn more about the different types of life insurance in Canada

What is whole life insurance used for?

Whole life insurance can be used in many ways, depending on individual circumstances. You can use it to:

A lot of people use the living benefits provided through whole life insurance to support their retirement. The cash value growth and/or dividends can be used to supplement retirement income.

The funds from your death benefit can be used to pay for final expenses or end-of-life medical costs.

It helps your family not have to dip into their savings to pay for these kinds of things. They won’t have to mourn you and have the added financial burden of funeral costs.

Your loved ones can use the tax-free death benefit in any way they need or want. They can use it to replace the income you would have normally brought home, and pay bills or pay for children’s education. Or they can travel the world or invest.

Whole life insurance lets you keep providing for them even after you’ve passed on.

One of the features of whole life insurance that people love most is how it can help you with financial security during your lifetime.

Cash value grows over time and you can access it in a number of ways to help pay bills, reinvest, or make other smart “money moves.” All while you get the peace of mind that comes with life insurance.

This is why life insurance is sometimes called “cash value life insurance.”

How to access cash value

You can use dividend payments in a number of ways to help with saving money. A lot of older Canadians use it to:

  • Supplement retirement income
  • Pay off insurance premiums, so their insurance policy basically pays for itself
  • Help pay for current expenses, like children’s education
  • Get a cash payout for liquid assets
  • Buy paid-up additions, which means the death benefit they leave for beneficiaries actually grows over time
Learn how paid-up additions work

Many Canadians don’t realize this, but the property and assets you leave behind for your family can be taxed. A whole life policy can act as a buffer by paying those taxes and fees. It’s an effective estate planning tool.

This lets you make sure the inheritance you left behind isn’t diminished for future generations. And they don’t have to pay anything to get that inheritance you left for them.

Learn more about estate planning with life insurance

We’ve already seen that the money you leave behind can help your family. But it can also be a final financial gift to your favourite charity. Think of it as your way to give one last boost to a cause you really care about.

Whole life insurance can be purchased as a gift for your children or grandchildren. It can give them lifetime coverage that’s already paid up, and at a low cost to you.

Just think: the policy’s cash value could have grown so much by the time they turn 18 that they could go to college without getting into student debt. Or, by age 25, it could give them enough to afford a downpayment for a home.

It’s a great way to give children or grandchildren future financial safety.

Learn more about whole life insurance for children

Business owners may use whole life to support a business. It can help fund the purchase of a partner’s shares in the business at death or support loans as collateral.

Should I get whole life insurance?

You should get whole life insurance if you:

  • Want to be covered into old age without having to worry about it later in life
  • Want a built-in option to help supplement income in retirement or to cover other financial needs
  • Want to pay the same rate your entire life
  • Don’t have a strict budget
  • Want to make sure your surviving family doesn’t have to pay for your end-of-life expenses

Whole life insurance is ideal for people who have long-term needs. It’s usually more popular with older Canadians because of this. Young Canadians can get it too, to help lock in low life insurance rates permanently.

Because it lasts forever and has a cash value component, this type of policy can be pricey. It is usually more expensive than term life insurance policies. But these added benefits are often worth the cost if your budget has room for it.

A whole life insurance policy can be used during your lifetime and can help benefit your beneficiaries after you pass away.

Is whole life insurance worth it?

Yes, whole life insurance can be worth it if it meets your needs. You get the advantage of living benefits that you can use now, plus a guaranteed death benefit for your family. In that case, it’s like having your cake and eating it too from an insurance perspective.

Remember, whole life insurance is most valuable to you if you can let it grow over time. And if you don’t need it to cover immediate needs. If you’re young and thinking about long-term protection, then whole life is definitely worth the cost. By the time you reach retirement age, your cash value would have grown significantly.

If you need coverage for short-term needs like paying off a mortgage or something that would be taken care of by the time you reach a ripe old age, then term life insurance is probably a better option for you.

Compare term vs whole life insurance

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 growth – Premium payments are reinvested and grow cash value that you can access during your lifetime
  • 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
  • Death benefit growth – Your death benefit or coverage amount can grow over time with cash value or dividends
  • Level premiums – The cost of your policy will remain consistent as long as your 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, like term
  • Not as flexible as term life insurance – 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
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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.

Usually, if you’re young, in excellent health, and don’t smoke, your insurance premiums will cost less. Just keep in mind that it’s also normal for whole life insurance to be more expensive than term life.

The chart below can give you an idea of how much whole life insurance can cost at different ages.

Whole life insurance quotes in Canada (2024)

Age $100K coverage - non participating $100K coverage - participating
20 $42/month $44/month
30 $57/month $63/month
40 $85/month $92/month
50 $127/month $138/month
60 $202/month $217/month
70 $376/month $376/month

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

The cost of insurance in Canada can change depending on your personal details and also your policy’s details. This chart is just to give you an idea of what kind of premium prices you can expect.

Because there are so many factors that affect policy premiums, the best way to know how much your whole insurance will cost is to get your own quote from PolicyAdvisor.com. Use our online quoting tool to get an instant quote in seconds.

What affects whole life insurance premiums?

Whole life insurance premiums depend on factors like:

  • Age
  • Sex
  • Current health
  • Medical history
  • Family medical history
  • Smoking status
  • Occupation
  • Lifestyle/hobbies
  • Policy type (participating or non-participating)
  • Amount of coverage
  • Regular or limited pay
  • Life insurance riders

Life insurance companies look at these factors to determine the financial risk to them to insure you. They call this your risk profile, and they charge you higher prices if it seems more risky.

For example, let’s say you are over 65, have health concerns, smoke, and participate in extreme sports. The insurance company will believe there’s a good chance you could pass away before they can raise enough funds (through investments) to cover your death benefit. In this case, they would charge you a high premium.

On the other hand, let’s say you are 30, in excellent health, and don’t smoke. Chances are you will live for a long time, giving the company time to invest your premiums so they don’t take a loss when they pay out your death benefit.

At the same time, the features of your whole life policy can also make it more expensive. If you choose to get a policy that pays dividends, one that you only have to pay for 20 years, one with $1 million in coverage, etc., your premiums will be higher.

What are the payment options for whole life policies?

You have 3 options to pay for your whole life coverage:

  • 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
  • Limited payments — you pay higher premiums for the first several years of the policy to pay it off early (usually 5-10  years) and then you don’t have to pay anything else for the rest of your life. This is unique to permanent insurance policies. You can arrange limited pay with either monthly or annual premium payments
  • Reduced paid-up payments — you use your cash value to pay lower premiums, but your death benefit is also reduced
  • Modified payments — you pay lower premiums at first, but then the price increases over time. This could be for monthly or annual premium payments, but it depends on your insurance provider

How much whole life insurance should I buy?

The general rule of thumb is to get at least 10-15x your yearly income in life insurance. But experienced advisors will tell you that you may not actually need that much for whole life insurance. It depends on what you are getting whole life insurance for.

When deciding on how much coverage you should buy, you should think about things like:

  • How much money you would need for retirement support
  • How much money you or your family would need to keep up with the cost of living and inflation
  • How much money you or your family would need to cover estate taxes or other taxes
  • Any bills or outstanding debt that would have to be paid off
  • How much you expect your end-of-life expenses to be (funeral, cremation, special ceremony, etc.)
  • Your budget

You will want to get enough coverage to take care of these long-term needs. But remember that some policies can pay out more than the death benefit too.

A “secret” strategy that some Canadians use is to start out buying a modest amount of whole life coverage and let it grow to a higher amount over time. Through the investment component, the cash value or dividends can gradually make the death benefit much higher by the time it’s paid out decades later.

If you need help finding out how much life insurance you need, you should speak with one of our licensed insurance advisors who can give you personal advice. You can also use our free whole life insurance calculator online to find out at a glance.

There are several factors you should think about when considering how much life insurance you may need.

When should I buy whole life insurance?

The best time to buy a whole life plan depends on you, your family, and all of your needs. There are different advantages to buying whole life at different stages of your life. So, it will depend on your unique circumstances.

When you’re young

Young people can buy a whole life policy with a limited pay option. While it’s more expensive, this will give you the option to pay it off while you’re still working. That way, by the time you retire, you won’t have to use your pension for insurance payments. You would have already paid everything and now you can just enjoy having coverage for life. And you would get the benefit of low premium rates, based on your age and health.

When you’re older

Premiums become more expensive when you’re older. But by then, you likely also would have a stable job and more personal finance know-how to be able to navigate a whole life policy with an investment aspect. You may more easily afford the higher premiums, and may be more comfortable navigating the investment benefits that come with that.

For children

As we saw earlier in this article, a whole life insurance policy for a child can go a long way in setting them up for a secure financial future. Adults are allowed to create a full life insurance policy on behalf of a child, and then the child takes it over once they reach a certain age. If it’s paid up, this could be a fantastic financial gift for their future.

You should speak with one of our financial experts one-on-one to find out if and when whole life coverage might be right for you.

Author Photo
Whole life insurance is better for financial protection in the long run. It helps to make sure your family won’t have to struggle with money needs when you’re no longer around.
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Jiten Puri
CEO, PolicyAdvisor.com

Do I have to do a medical test to get a whole insurance policy?

It depends. These days, insurance companies may not ask for a medical test in many cases. They may just ask a few health questions.

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.

Learn more about life insurance medical exams

How can I find cheap whole life insurance quotes in Canada?

Find the cheapest whole life insurance quotes when you compare the best companies online at PolicyAdvisor.com! Our platform scans the Canadian life insurance market in minutes to bring you the best rates in seconds, making it quick and easy to find your life insurance match.

You can also speak with one of our advisors to find out how to get the best premium deals on life insurance. Or, check out our listing of which Canadian companies are currently offering promotions on insurance.

Speak with an advisor

Knowing which policy is best for you really depends on what your financial goals are. We know there are a lot to choose from, so our advisors are happy to help with your permanent life insurance needs!

Our team has in-depth knowledge of the Canadian insurance industry, so we can guide you based on the different benefits and drawbacks of each company. Let our licensed experts help you compare and make an informed choice. Book some time with us to see what your coverage options are and if whole life insurance coverage is right for you.

FAQs about whole life insurance

Cash value is the part of a whole life insurance policy that builds value over time. It can also earn dividends for some policies.

Policyholders can access cash value to withdraw it or use it for a policy loan if they need to. Access to this cash value is called a living benefit.

You should also know the difference between the policy’s cash value, and the cash surrender value.

Blue bulb

Cash Value is the sum of money that builds inside your insurance policy from investments.

 

Cash Surrender Value is the amount of money from your cash value that you can get if you cancel your whole life policy, minus any cancellation fees.

It depends on your provider. Most Canadian companies will let you access your policy’s cash value anytime after the 4th or 5th year of your policy being active. You will receive the cash surrender value, which is the cash value minus any fees.

But you may want to wait. The longer you let the cash value accumulate, the more value it will have.

For example, after a few years, your policy may only have a couple of hundred dollars in cash value. That amount would be small compared to if you waited a few more years, when it may have increased to thousands.

Learn more about cash surrender value

The death benefit of a life insurance policy is NOT taxable. However, things may get a little bit complicated if you want to cash in on your policy dividends.

If you reinvest your dividends into the policy, they won’t be taxed. But if you decide to cash out your policy or try to access the cash value in a way where you make a financial gain, you may be taxed.

Additionally, if you put the policy in your business’s name, your premiums may be tax-deductible. It’s always best to speak to a financial advisor about your specific plans for your whole life policy to know for sure.

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 we would warn you that if something seems too good to be true, it usually is.

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

Aside from whole life, you can get other types of permanent life insurance plans or something called term life insurance. In Canada, permanent and term are the two main types of life insurance.

A term life policy covers you for a specific period of time, called a term. Unlike whole life insurance, it does not have an investment component, cash value, or dividends. Because of this, it has more affordable coverage.

Other types of permanent coverage include:

  • Universal life insurance — a permanent policy that gives you more control over the investment component
  • Term to 100 insurance — a policy that lasts your entire life like permanent insurance, but is like term life insurance because it doesn’t offer cash value
  • Modified whole life — a rare type of policy where premiums start off low but increase over time

If you’re not sure which is better for you, contact us. Our friendly licensed advisors are here to help and happy to help you figure out which life insurance plan would work best!

Need help?
Call us at 1-888-601-9980 or book time with our licensed experts.
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KEY TAKEAWAYS

  • Whole life insurance covers you for your entire life
  • Whole life insurance gives you a guaranteed death benefit and an investment component you can use during your lifetime
  • Premiums can be costly and can depend on the type of whole life policy you get

By Jason Reynold Goveas
Senior Insurance Advisor, LLQP
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