Whole life insurance is permanent life insurance designed to stay with you for life. Along with a guaranteed death benefit, many whole life policies can also build cash value while you own them.
Whole life insurance is a type of permanent life insurance. Instead of protecting you for only 10, 20 or 30 years, it is designed to provide coverage for your lifetime as long as the policy requirements are met.
Whole life policies typically include guaranteed premiums, a guaranteed death benefit and guaranteed cash values. Some policies are also participating, which means the policyowner may receive dividends. Those dividends are not guaranteed.
If the reason for owning insurance is likely to exist whenever you die, permanent coverage may deserve a different conversation than temporary term insurance.
Whole life can create money for children, grandchildren, a spouse or another person you want to financially support after your death.
Certain assets can create tax or liquidity needs at death. Permanent insurance can help make cash available instead of forcing other assets to be sold.
Whole life can build cash value over time. Depending on the policy, that value may also be accessible while you're alive.
One of the most important things to understand when looking at whole life insurance is which values are guaranteed in the contract and which values depend on future performance.
A good illustration should show these separately. You shouldn't have to guess which numbers are promises and which numbers are projections.
The contractual amount payable at death, adjusted for things such as outstanding policy debt.
Whole life generally provides a contractual premium schedule that does not increase because you age.
The contract can include guaranteed cash values that develop over time.
Participating policies may receive dividends, but future dividend amounts are not guaranteed.
You'll often hear the word “participating” when looking at whole life insurance in Canada. Here's what it actually means.
A non-participating whole life policy does not participate in the insurer's participating account and does not receive policyowner dividends.
Premiums from participating policies are pooled in a participating account. If the account's experience supports it, the insurer may declare policyowner dividends.
Participating policy premiums flow into a participating account managed by the insurance company.
The account's experience includes factors such as investment results, claims, expenses and other assumptions. Based on that experience, the insurer may declare policyowner dividends.
Depending on the policy, dividends may be used in different ways — including purchasing additional insurance, reducing premiums or receiving the dividend in cash.
Policyowner payments form part of the insurer's participating account.
The insurer manages the assets and uses the account to meet policy obligations and expenses.
Investment experience, claims, expenses and other factors can influence the dividend scale.
Dividends are not guaranteed and can be higher or lower than illustrated in the future.
Whole life policies can build cash value over time. With an exempt life insurance policy, growth inside the policy receives favourable tax treatment within applicable Canadian tax rules.
That doesn't mean every dollar can simply be withdrawn tax-free. How you access the policy matters.
You may be able to withdraw value from the policy. A withdrawal can reduce policy values and may result in taxable income.
Some policies allow you to borrow against the cash value. Interest applies and unpaid debt can reduce the death benefit.
In certain situations, the policy may be assigned as collateral for a loan from a financial institution, subject to lender approval.
Depending on the insurer and product, you may be able to choose a shorter guaranteed premium-payment period or spread premiums over a longer period.
Sometimes that is exactly the right question. Whole life should solve a permanent problem — not simply be chosen because it has cash value.
That portion of the need may be better suited to temporary term insurance.
If the client wants a guaranteed amount available whenever they die, permanent coverage can address a different need.
A combination of larger temporary term coverage and smaller permanent coverage can sometimes match the two responsibilities more closely.
Permanent insurance makes more sense when there is a reason for permanent insurance to exist.
The question isn't “Which is better?” It's “Which job am I asking the insurance to do?”
The higher premium has to make sense in the context of your needs, budget and long-term financial priorities.
Whole life illustrations can contain guaranteed cash values, projected dividends, different dividend options, additional paid-up insurance and several columns of future values.
Our job is to help you understand what those numbers actually mean before you commit money to the policy.
Start with your needs rather than starting with a product.
Think through your mortgage, debts, family responsibilities and potential income-replacement need.
Calculate My NeedsAnswer a few questions to better understand whether term, permanent or a combination may be worth discussing.
Take the QuizWhole life has more moving parts than term insurance. These are worth understanding before deciding.
We'll help you determine whether the need is temporary, permanent or a combination — and explain the options, guarantees and trade-offs before you decide.
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