What is whole life insurance and how does it work?


Whole life insurance is a type of permanent life insurance that covers you for your entire life, rather than just for a term. It is used for a range of use cases from covering final expenses such as funeral costs to managing estate taxes after you die. It also comes with living benefits as well which can be used for retirement planning or investment growth. Both participating or non-participating whole life coverages offer the living benefit of the policy’s cash value, whereas just participating allows access to policy dividends.

By Jiten Puri
CEO & Founder, Insurance Advisor, LLQP
15 min read

What is whole life insurance?

Whole life insurance, like the name implies, is an insurance contract that covers you for your entire life—as long as you pay your premiums. It gives your beneficiaries a tax-free payment regardless of when the claim happens. Whole life insurance is a special type of permanent insurance where you have lifelong coverage, guaranteed and consistent premiums, and the feature that makes it stand apart—the ability to access additional funds during your lifetime. 

This type of insurance is often used as a catchall phrase in the industry to refer to permanent insurance. However, there are also other products that fall under permanent insurance (insurance that lasts your entire life) such as term-to-100 and universal life insurance.  

Unlike term life insurance which covers you for a specific duration or term (10, 20, or 30 years, etc.), a whole life insurance policy is in force until you pass away. The whole life insurance premiums stay the same for your entire lifetime, unlike term life premiums which increase upon renewal at the end of the initial term. Since you are covered for your entire lifetime, whole life insurance usually has a higher premium overall.

Learn more about the difference between term versus whole life insurance and whole versus universal life insurance

How does whole life insurance work?

With whole life insurance, you pay the same consistent, guaranteed premiums and when you pass away, your beneficiaries will receive a predetermined death benefit. 

When you pay your premiums for your whole life insurance policy, part of that money is used to cover the cost to insure you. The cost to insure you may vary at different ages. For example, if you are young and have no health conditions, it’s likely that you won’t pass away for a very long time, allowing the insurance company time to collect premiums to cover most of the cost of the death benefit. On the flip side, if you are 65+ with health conditions, the likelihood that you will pass away before standard premiums cover the cost of your death benefit is much higher, therefore making it more expensive.

Another part of your premiums is used by the insurance company for investments, managed by the insurance company. The income generated from these investments is given back to you, creating a cash value for the policy—it’s essentially an account held by the insurance company. You can treat your whole life insurance policy as a “high-yielding savings account.” With whole life insurance policies, you can access this cash value of your policy throughout your lifetime.  

Additionally, with whole life insurance, you can benefit from a policy’s dividends, depending on if you choose participating or non-participating whole life insurance (more on that below). 

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What is whole life insurance used for?

Whole life insurance can be used in many ways:

  • Financial support for your family: The death benefit, paid tax-free, can be used by the beneficiaries to replace the loss of income, to pay off debts, maintain their lifestyle, or pay for your children’s education.
  • Cover your final expenses: The guaranteed, lifelong coverage provides funds that can be used to pay for final expenses or end-of-life medical costs.
  • Leave a legacy: The tax-free death benefit creates an inheritance for the family or a financial gift for your favourite charity.
  • Preserve an inheritance:  The proceeds can pay for taxes and fees that are triggered when assets are transferred upon death, keeping the initial inheritance intact for future generations.
  • Access to your money: The dividend payments build up the cash value, which can be accessed to supplement your retirement income, help pay for your children’s education, or even pay future premiums on your policy.
  • Protect your children: It can be purchased to provide your child or grandchild with paid-up, lifelong coverage at a low cost, plus access to cash values to fund their education or to support a downpayment for a home.

For your business: Business owners may use it to fund the purchase of partner’s shares in the business at death or support loans as collateral.

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What are the different types of whole life insurance policies

There are two main types of whole life insurance coverages—participating whole life insurance and non-participating whole life insurance.

Participating whole life insurance

If you choose participating insurance, it allows you to choose an investment portfolio managed by the company. With this whole life policy, you get any dividends that investment made. 

These dividends are usually issued to the policyholder annually and can be paid as cash or further reinvested into the policy—meaning you could add the returns to increase your policy’s death benefit. These dividends are tax-free as long as they are reinvested in the policy. The reinvestment of dividends allows you to grow your death benefit from the policy, which can be used to leave a legacy for your family or pay for any taxes upon your passing away.

Participating whole life insurance policies are generally more expensive than non-participating. Premiums are based on the investment’s potential return expectation. However, it should be noted that while the death benefit is guaranteed with participating whole life, the policy dividends are not guaranteed.

Non-participating whole life insurance

Non-participating life insurance is a type of whole life insurance that offers permanent, lifelong coverage without an associated investment account or access to any periodic dividends. However, you still will have access to the policy’s cash value. This policy affords the comfort of a guaranteed death benefit, access to the cash value, as well as steady premiums at a low cost.

Learn more about different types of life insurance.

Benefits of whole life insurance

A whole life insurance policy has several benefits.

Lifelong Coverage: Unlike term life insurance, which only covers you for a designated amount of time (10, 20, 30 years etc.), whole life insurance covers you for your entire life. Whether that means you live another 20, 60, or 100 years, whole life policy will not expire as long as you pay your premiums. 

Guaranteed premiums: Having a whole life policy means locking in a rate for your entire lifetime, rather than experiencing an extreme premium hike upon renewing a term policy.

Cash Value: One of the major benefits of a whole life policy is having access to your policy’s cash value while you are still alive. This cash value builds as your premiums are invested and accumulate over time. You are able to withdraw the cash value or take a policy loan from the insurance company against it. Depending on the size of the cash value, some lenders may allow you to take loans against this cash value as collateral, however, if you cannot pay back the loan, then the difference is taken from your death benefit, plus interest. Still, having this access gives you added security knowing you have a place to borrow from when times are tough. 

Dividends:  As mentioned above, some participating policies allow you to gain from the dividends paid by the participating account. This can mean using your life insurance policy as an investment vehicle. 

Predictable rates of return: Insurance companies will release a report with their predicted rate of returns when they invest your policy premiums. They are able to make these predictions because they invest in assets and markets that are not as volatile.  

Estate planning: Because a whole life policy lasts your entire life, it means you will have a guaranteed death benefit. With that in mind, knowing there will be money in place, you can use this benefit to start planning how to distribute your estate, as well as your final expenses. For example, from the death benefit, you may want to put aside some to cover special arrangements for your burial. The rest of the death benefit can be distributed to beneficiaries of your choosing to pay off your debts, or however they choose to use the money.  

Pay now, benefit for life: One option offered with whole life insurance is what’s commonly referred to as “limited pay.” With a limited pay policy, you only pay your premiums for a set number of years, but you keep the policy for your entire life. For example, say you purchase a whole life policy when you are 35 years old with a 20-year limited pay option. This means you only pay your premiums from when you are 35-55 (potentially your best earning years), and you get to keep your policy for the remainder of your life. However, keep in mind because you are condensing a lifetime of premiums into 20 years, the annual premiums will be higher than if you spread them out.

Riders: When you purchase a whole life policy, you unlock the ability to add certain life insurance riders, such as disability, critical illness, child riders, and more.

Possible disadvantages of whole life

Price: Because whole life insurance lasts your entire life, it is more expensive premium-wise than a term policy. With term life insurance there may be a chance you won’t die during the term, so the insurance company may not have to pay out—this means lower financial risk to the company, so they set the rates lower. With whole life insurance, they know they have the pay out, it’s just a matter of how soon. 

Handcuffed investments: The participating account is managed by the insurance company, limiting your choices in the free market. Insurance companies tend to keep stock in steady asset classes with low volatility. Moreover, you may find greater dividends in investing your money privately—if you are savvy at playing the market. 

Not as flexible: Some other permanent policies, like universal life insurance, allow you to tailor not only your coverage but your premiums as well. With whole life insurance, your premiums are locked in.

What does whole life insurance cost?

The cost of life insurance depends on many personal and policy factors. When you apply for coverage, insurance companies will look at your: 

  • Age
  • Gender 
  • Smoking status
  • Medical history 
  • Health status
  • Family medical history 
  • Driving history, extreme sports, and adventurous extracurricular activities
  • Occupational risk 

When they look at these factors, they determine the financial risk to them to insure you. For example, if you are over 65, have health concerns, smoke, and participate in extreme sports, the likelihood that you will pass away before the insurance company can raise enough funds (through investments) to cover your death benefit is low—this would lead to a high premium. However, if you were 30, had no health issues or family history of health issues, and didn’t smoke, chances are you will live for a long time, allowing the company time to invest your premiums so they don’t take a loss when they pay out your death benefit. 

Other product factors that will affect the premiums of a whole life policy are: 

  • The amount of death benefit
  • Optional riders added 
  • Whether you’re selecting participating or non-participating 
  • Whether you’re selecting regular or limited pay options

If you’re looking for some ballpark numbers, check out the chart below! This is a rough pricing guide for someone in good health and non-smoking looking for a non-participating whole life policy. These premiums are monthly and spread out over your entire life (called the life pay plan).

Age 30 years old 40 years old 50 years old
Gender Male Female Male Female Male Female
$50k coverage $35.82 $32.45 $46.85 $42.57 $74.84 $61.79
$100k coverage $60.03 $53.55 $84.78 $74.16 $133.92 $114.66
$200k coverage $115.56 $102.60 $165.06 $143.82 $263.34 $224.82

Of course, these premiums will vary based on the applicant’s information, desire for coverage, and what the insurance company has to offer. Because there are so many factors, the best way to know how much your whole life will cost is to get a quote individualized to you and your family’s financial needs. Using PolicyAdvisor’s quick, online tool, you can get an instant quote in seconds.

What is cash value and when can I cash out my whole life insurance policy?

Cash value is the component of a whole life insurance policy that earns dividends and is available to the insured to withdraw or borrow against in case of a financial need. You should also know the difference between the policy’s cash value, and the cash surrender value. 

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

Cash surrender value – is that same sum of money that you are entitled to if you cancel your whole life policy, minus any cancellation fees. 

You can access your policy’s cash value whenever you would like! You can borrow against the value from the insurer or use it as collateral for a loan from your bank. You may also withdraw your cash value, but this may reduce your policy’s death benefit. There can also be tax consequences if you access your policy cash value. 

The longer you let the cash value accumulate, the more value it will have to you both when the policy is in force or if you decide to cancel and take the policy’s cash surrender value. But you may want to wait. For example, after a few years, your policy may only have a couple of hundred dollars in cash value, which would be fairly insignificant compared to years later when it may have increased to thousands.

How to pick the best whole life policy?

Knowing which policy is best for you really depends on what your financial goals are. Every company has its own benefits and drawbacks depending on what you’re looking for—some have higher guaranteed rates of returns than others. 

At PolicyAdvisor,  we’ve ranked Canada’s best whole life insurance companies for you, subject to what you’re looking for. For some, they are looking for an easy application process, some are looking for low premiums, others are looking for companies that give them all the rider options. It all depends on what you value most!

PolicyAdvisor’s licensed experts can help you compare a wide range of whole life insurance products and make an informed choice for both your coverage and financial goals. Book some time with us to see what your options are and if whole life insurance coverage is right for you.

Whole Life Insurance FAQ

Is Whole Life Insurance the same as “Cash Value Insurance?”

Whole life insurance is also sometimes called “cash value insurance.” This is because, unlike term insurance, whole life insurance provides you the opportunity to access the cash value of the policy while you’re still alive. Access to this cash is called a living benefit.

Are whole life insurance policies taxable?

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, the premiums may be tax-deductible. It’s always best to speak to your advisor about your specific plans for your whole life policy to know for sure.

How do I find cheap whole life insurance?

Just like any other item you buy, it’s best to shop around! Not all life insurance policies are the same—you want to select on that meets your specific needs. We work with over 20 of Canada’s best life insurance providers. Check out our reviews of each company, get an instant online quote, or speak to one of our advisors today to find out how to get the best premium deals on life insurance.

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

The information above is intended for informational purposes only and is based on PolicyAdvisor’s own views, which are subject to change without notice. This content is not intended and should not be construed to constitute financial or legal advice. PolicyAdvisor accepts no responsibility for the outcome of people choosing to act on the information contained on this website. PolicyAdvisor makes every effort to include updated, accurate information. The above content may not include all terms, conditions, limitations, exclusions, termination, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details. In case of any discrepancy, the language in the actual policy documents will prevail.  All rights reserved.

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By Jiten Puri
CEO & Founder, Insurance Advisor, LLQP
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