Whole Life Insurance is part of the family of permanent life insurance products. That means that generally premiums are level for life, unlike term life insurance premiums that increase over time.
(If you’re looking for a primer on available types of life insurance, please see our article on Types of Life Insurance)
Whole life insurance is a permanent life insurance product which means that it lasts your entire life (it never expires). It has two main attributes which are the death benefit and the cash value. The death benefit starts at a specified number chosen by the policy owner (e.g. $100,000). This is the amount that is paid out to your beneficiaries, tax free in the event of death. The cash value starts at $0.00. As you fund the policy premiums over time, the death benefit and the cash value will both increase.
Whole life insurance premiums in the early years of the policy exceed the insurance costs of the company. Later in life whole life premiums, because they typically remain level, will actually be lower than the insurance costs of the company on an annual basis. What you are effectively doing is overpaying the true annual insurance cost in the early years of the policy. This over funding is then saved up or reserved inside the policy (called the cash value). Later when costs exceed what you’re paying in premiums, there’s money from the early years to make up that cost differential. Pay more now to pay less later.
Now, if you cancel the policy after a period of time, the companies will typically refund you a portion of that over payment in premium (cash value). This is known as a cash value or cash surrender value. It is important to note that most of that cash value will be a refund of over payment in premium, especially in the early years.
In past years, many insurance companies were mutual. Mutual companies typically declared a non-guaranteed dividend to participating policy owners. These dividends were then used to automatically create various other options including small units of paid up insurance, or increasing cash value, or one of 2 or 3 other options. Dividends were projected as being used to pay up premiums in later years. In the 1980’s and later, dividends being paid out did not meet earlier projections and as a result many policy owners had policies they had assumed would have premiums that became paid up but in reality did not. Consumers then launched various ‘vanishing premium’ lawsuits against insurance companies and were successful with these suits.
The above graph shows an example of a whole life insurance policy for a 30 year old, male, non-smoker for $100,000 of coverage. The death benefit starts at $100,000. The cash value (cash surrender value) starts at $0.00. Every year the death benefit and cash value grow until they are equal at age 100. In this example, the death benefit grew to almost $650,000 at age 100 (started at $100,000).
Who Is Whole Life Insurance Designed For?
Whole life insurance is a very unique product designed for certain individuals. We highly recommend speaking with a life insurance broker to determine if whole life insurance is appropriate for you. You should be in a very strong financial position before considering to purchase whole life insurance. Your retirement should be fully funded and you should have a surplus of investments.
Many people purchase whole life insurance to cover their final expenses (funeral costs), estate costs/planning, probate fees, taxes at death, legacy, business succession, etc.
- Peace of mind knowing that your beneficiaries will receive a lump sum amount, tax free in the event of your death
- Policy never expires and is guaranteed to pay out, regardless of your age
- Premiums (cost of the policy) are fixed
- Policies are very customizable which allows you to ensure that it suits the needs of you and your family
Permanent Life Insurance
Whole life insurance is one of the few permanent life insurance products available in Canada. If you are interested in learning about other permanent life insurance products, please use the links below.
- Whole Life Insurance
- Universal Life Insurance
- Term to 100 Life Insurance
Today whole life insurance is still available (you can get a free online quoter instantly by clicking Free Quote at the top of this page), however there are permanent insurance products available today that provide better guarantees at a lower cost. Term to 100 and Universal Life are two such options.
When purchasing life insurance it is very wise to seek out independent, unbiased advice from a life insurance broker who represents all of the life insurance companies in Canada. Feel free to reach out to us by email or phone at 1-877-344-4011 to speak with one of our licensed brokers and determine what product is best for you and your family.