Updated: Nov 23
How to buy whole life insurance...
If your looking for permanent life insurance that provides coverage for your lifetime then consider whole life insurance...
In this life insurance buyers guide we'll cover
-"what is whole life insurance"?
-"how does whole life insurance work"?
-"what are the benefits of whole life insurance"?
-"how to buy whole life insurance"?
-"how much does whole life insurance cost"?
What is whole life insurance and how does it work?
Whole life insurance in Canada is a type of permanent life insurance that provides coverage for your lifetime, as long as you pay the premiums. Each type of whole life insurance has its own set of features, benefits, and considerations. All whole life insurance policies offer both a tax free cash payment (death benefit) to your beneficiaries and a cash value component that accumulates over time
When choosing a whole life insurance policy it's essential to consider your financial goals, risk tolerance, and long-term objectives along with the various riders and policy features you can add.
What types of whole life insurance policies available?
There are several types of whole life insurance available. While whole life insurance offers many benefits it is more expensive than term life insurance due to its lifelong coverage and cash value component. You can purchase a basic whole life policy that either accumulates cash value or purchases additional life insurance (also called paid up additions). You can also include an option that allows you to add additional money to the policy usually on anniversary dates
You can also add disability or critical illness riders. Some insurance companies allow you to reclaim critical illness premium payments on 10-15 year anniversary dates others don't have this feature. Most life insurance companies offer a disability income rider (replaces up to 66% of your income) or a disability premium holiday in event you become disabled and cant work
When you are shopping for life insurance its good to consider all of the alternative ways you can build up your policy coverage including critical illness, disability and any return of premium riders options life critical illness offers
Traditional whole life insurance:
Also known as ordinary life insurance. This is the most popular type of whole life policy. This policy offers a fixed premium payment and a guaranteed death benefit. The cash value accumulates at a predetermined rate, and the policy remains in force as long as premiums are paid. Participating whole life insurance policies offer dividends that can be used to automatically buy more life insurance or be added to the accumulating cash value
Single premium whole life insurance:
You are buying a fully paid up whole life insurance policy. This policy requires a one-time lump-sum premium payment. Then your policy remains in force for the your life time. The cash value starts growing immediately and can be substantial since it benefits from a large initial premium payment
Limited pay whole life insurance:
Also called 10 pay, 20 pay or 30 pay means with this type of policy that you pay enough premiums in the 10, 20, or 30 years to make your whole life policy fully paid up. After which your coverage is fully paid up, and no further premiums are required. The death benefit and cash value continue to grow even though no additional premiums are paid
Adjustable life insurance:
Also known as flexible premium adjustable life insurance. this type of policy allows the you to adjust the death benefit and premium amounts as their needs change. The cash value growth is influenced by premium payments and investment performance
Universal Life Insurance
Indexed Universal Life Insurance (IUL):
IUL is a form of whole life insurance that allows you to tie the cash value growth to the performance of a market index, such as the S&P 500. It offers potential for higher returns but comes with a cap on the maximum growth
Variable whole life insurance:
Variable life insurance allows you to invest the cash value in various investment options, such as stocks, bonds, and mutual funds. The policy's cash value and death benefit fluctuate based on the investment performance
Guaranteed Issue whole life insurance:
This type of policy is designed for individuals who have difficulty qualifying for other life insurance due to health issues. There are no medical exams as premiums are generally higher, and the death benefit payout may be limited during the early years of the policy (sometimes up to 2 years)
Whole life insurance benefits
Guaranteed Death Benefit: Whole life insurance provides a guaranteed death benefit that will be paid to your beneficiaries after your death
Tax Advantages: The cash value in a whole life policy grows on a tax-deferred basis, which means you don't pay taxes on the growth until you withdraw it. The death benefit is generally received tax-free by the beneficiaries
Lifetime Coverage: Unlike term life insurance, which offers coverage for a specific term (e.g., 10, 20, or 30 years), whole life insurance remains in force for your entire life, as long as premiums are paid
Fixed Premiums: Whole life insurance policies usually have level premiums, meaning the premium amount remains the same throughout the life of the policy. Premiums are higher compared to term life insurance but do not increase with age
Access to Cash Value: You can access the cash value through policy loans or partial surrenders. Loans are typically tax-free, but unpaid loans and interest will reduce the death benefit
Policy Loans: You can take out a policy loan against the accumulated cash value of your whole life insurance policy. The loan amount and interest will be deducted from the death benefit if it's not repaid during your lifetime. Only a few financial institutions offer policy loans on the cash value on whole life insurance policies. Manulife Insurance bank has the most developed lending products
Surrender Charges: If you decide to surrender (cancel) your whole life policy and withdraw the cash value, surrender charges apply during the early years of the policy. Surrender charges gradually reduce over time until there are non left
Death Benefit Offset: Any outstanding policy loans or loan interest will be deducted from the death benefit if you pass away before repaying the loan
Estate Planning Tool: You can use whole life insurance for estate planning, providing liquidity to cover estate taxes, ensuring inheritance for heirs, and preserving family wealth.
Retirement Supplement: Some individuals use whole life insurance as a retirement supplement since they can access the cash value during retirement for additional income.
Policy Customization: Whole life insurance policies often offer various riders (additional features) that can be added to tailor the policy to the insured's specific needs and preferences.
How whole life insurance works
Whole life insurance features and benefits
Guaranteed Insurability Rider (GIR): Allows you to purchase additional coverage at specific life events without undergoing medical underwriting. This rider is beneficial if you anticipate the need for more coverage in the future
Accidental Death Benefit Rider (ADB): Provides your family with additional death benefit if your death is a result of an accident. Increasing the policy's payout if accidental death occurs.
Waiver of Premium Rider (WP): Waives your premium payments if you become disabled and cant work work. This ensures your policy coverage continues during periods of disability
Critical Illness Rider (CIR): Pays you a lump sum if your diagnosed with a specified critical illness during the policy term. Provides you with the necessary financial support to cover medical expenses and other costs during a critical illness
Accelerated Death Benefit Rider (ADB): Allows you to access a portion of the death benefit in advance if diagnosed with a terminal illness or a specified critical illness. This rider provides you with financial flexibility during health challenges
Paid-up Additions Rider (PUAR): Allows you to purchase additional paid-up life insurance coverage, increasing your policy's cash value and death benefit
Long-Term Care Rider (LTCR): Provides benefits to cover long-term care expenses if you need assisted living or nursing home care. This rider helps preserve your policy's death benefit while accessing funds for care
Return of Premium Rider (ROP): Returns a portion of the premiums paid during the policy term if you survives the policy's duration. Usually a rider added to critical illness policies in Canada
Disability Income Rider (DIR): Provides a regular income if you become disabled and cant work
Whole Life Cash Value: Cash value calculations of Canadian Whole life insurance
Premium Payments: When you pay premiums for your whole life insurance policy, a portion of it goes towards the cost of insurance coverage, administrative fees, and other expenses, while the remaining amount contributes to the cash value.
Guaranteed Cash Value Whole life policies typically have a guaranteed minimum cash value that grows over time. This amount acts as a savings component growing tax free. Is guaranteed by the insurance company regardless of the investment performance.
Investment Component: Whole life insurance policies include a savings and investment component that accumulates over time. The insurance company invests a portion of the premiums in various assets, such as bonds and stocks, aiming to generate returns. Many insurance companies are currently paying a 5.5% to 5.75% dividend amount for participating policies. The additional participating dividend income generated by the insurance company can either be used to buy more life insurance (also called paid up additions) or accumulate in the cash value. These additional cash values are not guarantied and do vary over time
Dividends (participating policies): Some whole life insurance policies are participating, meaning policy owners may receive dividends from the insurance company's profits. Dividends can be used to increase the death benefit, accumulate additional cash value, add more life insurance or be taken as cash
Non-Guaranteed Cash Value: In addition to the guaranteed cash value, most whole life policies offer non-guaranteed dividends for higher than expected investment returns. The actual cash value will exceed the guaranteed amount when the insurer's investment performance is higher than current dividend amounts