What is Whole Life Insurance?

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What is whole life insurance?

As a type of permanent life insurance, whole life insurance offers coverage you until you die. The premiums and death benefit are the same throughout the duration of the insurance contract. A whole life policy also bundles as an investment tool.

A part of your premium payments go into a savings account that grows tax-deferred at a rate set by the insurer.

However, returns on investment are lower than other investment vehicles, partly because the provider deducts administrative fees for managing the insurance policy where another investment type insurance company might not.

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Whole life insurance quick facts

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Term life or Whole life insurance

When shopping for life insurance, you’re likely to come across two types of life policies — term life and whole life. While whole life insurance is suitable for various needs, it may not be a good fit for everyone.

Term life insurance is the simplest and purest form of insurance. In return for premium payments, it provides life insurance coverage — nothing else (unless you add riders). But the life insurance coverage is for a fixed time period.  

Whole life insurance has no end date. It also doubles up as an investment tool, allowing you to build cash value that you use during your lifetime. For this type of insurance rates are considerably more expensive than term life.

Here’s a quick rundown of the main differences between the two.

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Advantages of whole life insurance

Protection for life

A whole life policy is a contract without an end date. The security of knowing that your loved ones will receive a guaranteed death benefit upon your death, regardless of when you pass away, is a great comfort.

Level Premiums

The premiums paid stay the same throughout the life of the policy. Some policies allow the policyholders to pay off the policy early. After that, you won’t have to pay premiums, though the insurance coverage will remain in force until your death.

Builds Cash Value

Cash value is an important selling point for whole life insurance. It is a savings account built into your policy that grows with time. You can borrow from or against the cash value and even use it as collateral for third-party loans.

Typically, this type ofpolicy builds up cash value slowly to start with but then picks up the pace after some years. Eventually, your policy’s cash value may accumulate enough that you could use it to pay policy premiums until your death.

Tax Advantages

The death benefit of a life insurance policy is typically tax-free. In addition, the cash value grows at a tax-advantaged basis. That means the money you withdraw won’t get taxed, provided the withdrawn amount is not more than the amount you’ve already paid in.

If you've maxed out your RRSP and TFSA, a whole life policy could be another investment medium to consider.

Potential Dividends

Some whole life insurance policies pay annual dividends. When you are planning for retirement, you will want to consider how you will generate retirement income during that time. One option is to reinvest your insurance policy dividends into the policy to accumulate cash value more quickly. Alternatively, you can use the money to buy more coverage or pay off a part or all of your premium.

Cost of whole life insurance

Whole life insurance is more expensive than term life insurance. How much more? Well, you may have to pay anywhere between five to 15 times more than term life insurance for the same amount of coverage.

Investing in permanent life insurance is heavy on the pocket for two reasons. One, it always pays the total life insurance benefit — of course, provided you pay premiums — since there’s no expiry date. Two, it includes a savings component.

Sample Whole life insurance rates

Here is a sample of monthly whole life rates for a 40-year old, non-smoker based on a Standard health rating. This coverage is for monthly premium rates for life policies offered by Dundas Life from our partner company Assumption Life.

Life insurance premiums are always unique to the insured. How much you will pay for coverage depends on many factors, such as:

Age

Like other insurance products, whole life insurance gets more expensive with age. Typically, the premium amount goes up by 8% to 10% for every year of age.

Coverage amount

The greater the death benefit, the higher the premium payments. So, a whole life policy with a $500,000 payout will be costlier than one having a death benefit of $100,000.

Health

When you apply for a whole life insurance policy, the insurer will review your health through a process called underwriting. You will need to take a medical test and answer some health-related questions.

Healthy applicants receive a more favourable classification and consequently get approved at a favourable rate. On the other hand, certain health conditions, like diabetes or high blood pressure, increases your rates.

Family’s medical history

Certain illnesses, like diabetes, tend to run in families. For this reason, many insurers evaluate your family’s medical history when you apply. A family history of illnesses like heart disease, diabetes, or cancer can mean higher premium rates.

Smoking status

Smoking increases the risk of premature death. If you smoke, you’ll have to cough up more — up to two to three times — for coverage than a non-smoker.

Occupation & Lifestyle

If you have a job or a hobby — like skydiving or bungee jumping — that puts you at risk, the insurer can bump up your premium rates.

Your Gender

When it comes to life insurance, men pay 38% more than women for the same coverage on average, with the premium gap widening with age, because they have a lower life expectancy than women. (So if you are a man, that’s another reason to buy life insurance as early as possible).

Types of whole life insurance

There are many types of whole life insurance. Whatever your requirements are, you’re likely to find one that’s right for you.  

Ordinary whole life insurance

The premiums paid stay the same so long as you live. The policy builds cash value that grows at a tax-deferred basis. You don’t get to choose how the guaranteed cash values are invested. The initial annual cost will be much higher than a term life insurance policy of the same amount.

Limited payment whole life insurance:

You pay the required premiums for a limited number of years, like 5, 10, or 20 years. The benefits, however, last your entire life.

Single premium whole life (SPL) insurance

In exchange for a single large payment, the insurer promises a guaranteed death benefit until you die. Cash value builds up much faster because the policy is fully paid off.

Survivorship life insurance

It insurers two people instead of one. The policy can be joint-last-to-die. This means beneficiaries receive the death benefit only after the death of the second insured. For this reason, this type of policy also goes by the name of second-to-die life insurance.

Universal life (UL) insurance

You can vary the premium payments and adjust the death benefit as you see fit. In addition, the value of growth is not in the form of guaranteed cash. You get to decide how the insurer invests the policy’s cash value.

Variable universal life (VUL) insurance

The policy’s death benefit and cash value are tied to a particular investment account. They increase if the value of the chosen investments goes up. But they can also shrink considerably if the fund underperforms.

Participating whole life insurance

You have the right to participate in the surplus earnings of your insurer and receive an annual dividend whenever the life insurance company makes an excess profit. You can receive funds in cash or use them to purchase an additional coverage amount or reduce future premium payments. Alternately, you can leave dividends on deposit with the insurer and earn interest.

Final Expense Insurance

It has a small death benefit and as such is more affordable and easier to qualify than the standard permanent life insurance policy. Also known as burial insurance, it is designed to pay for end-of-life expenses, like medical bills and funeral expenses.

What are the best whole life insurance companies in Canada?

Life insurance is complicated — but buying the right life policy from the right insurer doesn’t have to be. Work with a third-party broker, like Dundas Life, to find the best possible coverage at the best price.

Life insurance needs are not one-size-fits-all. There is no such thing as the best life insurance provider for everyone. But there is a best insurer for your unique needs — and Dundas Life can help you find the right policy.

Canadian life insurance companies offer life policies for all kinds of financial goals. With expert help, you can easily locate a whole life insurance policy that meets your long-term goals and fits your current budget.

We can help you buy a whole life insurance policy from:

• Canada Life
• BMO
• Sun Life Financial
• Canada Protection Plan
• RBC Insurance
• Manulife, and more

Dundas Life partners with leading life insurance companies in the country. So, you can count on us to provide you with lots of options when you are shopping for a life insurer for lifelong protection.

Myths & Misconceptions

Ignorance may be bliss — but not when you are shopping for permanent life insurance. Incorrect or incomplete understanding of what you're buying can prevent you from picking the right type of life policy.

Myth #1 - You need to be in perfect health to qualify for life insurance

Insurance providers reward healthy individuals with lower premium rates. But that doesn’t mean you will get turned down if you are not in good health. If you smoke or have health conditions, like diabetes or high blood pressure, your premium rates will be higher than normal.

However, a critical illness may automatically disqualify you from getting traditional permanent life insurance coverage — but even then, it’s not the end of the road for you. You can opt for no medical life insurance or guaranteed issue life insurance.

Myth #2 – Life insurance is too costly for seniors

There’s no sugar coating it — purchasing insurance over 60 is significantly more expensive than buying it at 30. That’s because the older you get, the more risk you have of dying. And that pushes up the premium rates.

All the same, there are affordable life insurance plans for seniors to cover specific needs. And it goes by the name of final expense life insurance. Easy to get and easy on the pocket, it can help take care of end-of-life expenses, like medical care and funeral costs.

Myth #3 – Term life insurance is be better than whole life

These are two different types of life insurance products and address different needs. So, in a way comparing them is like comparing apples and oranges.

Term life insurance is more suitable for financial goals with an end date. For example, you want to put in place a safety net to help your spouse pay off the mortgage if you were no longer around or financially protect your children until they become independent. It is also a good choice if you are looking for an affordable way to financially protect your loved ones.

Whole life insurance, on the other hand, is an ideal solution in situations such as:

You want to leave a financial legacy to your heirs: Whole life gives you peace of mind since you know your children will receive the death benefit upon your death.

You want to preserve the value of your estate for your heirs: Buying whole life insurance within a trust to take care of the estate taxes after you pass away.

A spouse or partner depends on you financially or you have a special-needs child: A whole life insurance policy ensures your loved one gets what they need to live comfortably after you are no longer there to take care of them.

You want to create an extra source of savings: A whole life insurance policy gives you access to a pot of tax-free cash in the form of policy loans

Alternatives to whole life insurance

Since there are some disadvantages to whole life insurance, some alternatives are worth consideration as follows:

Term life insurance:

It can cost five to 15 times less than whole life, meaning you purchase a lot more coverage for the same price.

Universal life insurance:

Provides lifelong coverage and includes an investment component. But the cash value grows differently, which may suit your unique needs.

Single premium life insurance:

Instead of monthly or annual premium payments, you make a one-time payment that pays off the policy in full. As a result, the cash value grows much faster.

Is whole life insurance worth it?

Whole life insurance is a good fit for people having special circumstances. Does your spouse or partner depend on you financially? Do you have a special-needs child?

If you said yes, whole life insurance can give you peace of mind because you know your family will get the payout upon your death, whenever that may happen.

Have you maxed out other investment vehicles? If yes, whole life insurance can be a good fit for you.

For everyone else, term life insurance may be a better choice because it’s cheaper.

Get in touch with an independent advisor, like Dundas Life, to understand if whole life insurance is a better choice for you and find the best possible price for how much life insurance you might need.

Common FAQs

How does whole life insurance work?

Whole life insurance provides lifetime coverage and builds up cash that you can access during your lifetime. A portion of your premium payments goes into keeping the policy in force while another portion gets funnelled into a savings component that grows tax-free. So, this insurance type is both an investment tool and a way to secure your family’s financial future after you’re gone.

What are the main differences between term life and whole life insurance?  

Term life insurance plans covers you for a limited period and doesn’t accumulate cash value. Whole life insurance, in comparison, stays in force until you die and builds up cash value that you can use while alive.
However, these perks don’t come cheap. Whole life is substantially more expensive than term insurance.

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What are the main differences between whole life insurance and universal life insurance?

While whole life and universal life insurance are very similar, there are a couple key differences between the two. A whole life policy is all about guarantees. It provides a guaranteed level premium, guaranteed death benefit, and a guaranteed cash value. That means your premium will stay the same, as would the death benefit, and the cash value will grow at a rate set by the insurer. In whole life insurance, the insurer decides how the cash value is invested.

Universal life insurance offers flexibility — not guarantees. You can change your premium payments and adjust the death benefit as you see fit. Also, the cash value doesn’t grow at a steady rate. In the case of universal life, you decide what the investments consist of.

Is whole life insurance a good investment?

A portion of your whole life insurance premium gets deposited into a tax-free savings account. As the account grows, you can borrow against it or withdraw money from it.

However, compared to other investment tools, the return on investment on whole life insurance policies tend to be lower and fees higher. For this reason, whole life insurance is a good fit for only those people who’ve already maxed out other investment vehicles.

How much is whole life insurance?

Whole life insurance premiums are unique to the person applying for coverage. The insurer sets your premium rate depending on your insurance needs and other personal factors, like age, health, and smoking status.