You may have heard of whole life insurance while looking for the right coverage for you and your family. Your cousin mentioned it, or your financial advisor or the rep at the bank you talked to about getting a mortgage.
You’ve heard that it’s “the good stuff,” what well-off people buy to invest their money. You‘ve also heard that it may be a scam or that it’s not worth it.
Pretty confusing. How do you know if it’s right for you?
In this article, we’ll draw upon our advisors’ years of experience working in the Canadian life insurance industry and tackle the question: is whole life insurance worth it?
Before we tackle if whole life insurance is worth it, we’ll take you through what it is, how it works, and if it might be the right choice for you.
Whole life insurance is a type of permanent life insurance. Permanent insurance is one of the two main types of life insurance, with the other being term life insurance.
Whole life insurance includes a death benefit, just like a term life insurance policy, and it also contains a cash surrender value.
The cash surrender value is the amount of money an insurer will pay you if you access the cash value of your policy by cancelling, or surrendering, the policy early.
Surrendering a policy isn’t ideal, but sometimes happens when people can no longer afford their premiums or need emergency cash. It’s a step that would put a small portion of the cash you’ve paid in back into your hands, minus any penalties, but would effectively cancel your policy.
Whole life insurance can feel like a secure option because there is a lot of talk about guaranteed cash value, and many people think of it as the life insurance option where they can “get their money back.”
It’s often considered a “set it and forget it” solution to life insurance needs, but it may not be for everyone.
We’ll walk you through how the reality stacks up against what most people know about whole life insurance. We’ll also show you examples of what the policies and premiums would look like, so you can see what will work for you.
With a whole life insurance policy, the premiums you pay during the early years are usually higher than the amount needed to cover the risk of your death. These “excess premiums" form the policy's cash surrender value.
In other words, your insurance company takes the amount of money that you've overpaid during the early years and invests. This structure allows your account to accumulate interest, which increases your cash surrender value.
As you get older, your probability of passing away, and, therefore, the cost of your insurance, gets higher. It's no secret that you aren't going to live forever.
So when you reach a certain age, the premiums you pay for your policy won't be enough to cover the cost of your insurance. At this point, your insurance company will start pulling money out of your cash surrender value account to cover the difference.
The structure of whole life insurance allows you to pay the same premiums every year throughout the policy, even though the cost of your insurance technically increases over time.
If you decide to cancel your policy at any point, you'll receive the policy’s cash surrender value, or the amount of money you previously overpaid by.
Whole life insurance can be a reasonable choice for people who have very high incomes and are looking for some of the tax-deferred benefits of life insurance.
The average Canadian with dependents may not fit into this category.
As a result, a large population of people end up surrendering their whole life insurance policies, and that’s not good for anyone. A term life insurance policy offers better support to most Canadians.
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On rare occasions, an advisor might recommend a whole life insurance policy for estate planning purposes.
Why rare? Typically, it is only appropriate for people with very high incomes seeking tax-deferral components that might benefit their estate taxes.
However, for most people, the higher fees simply don’t justify the potential for tax deferral down the line.
In most cases, we’d recommend a term life insurance policy with affordable premiums that protect you for the entire term of the policy. Then instead of paying the higher fees, take the difference and invest it yourself.
Whole life insurance and universal life insurance are two different types of permanent life insurance.
Universal life insurance has some tax deferral features, but they aren’t as good as TFSAs and RRSPs. In addition, you need to put a lot into it to get anything out of it.
In some ways, choosing a universal life insurance policy means paying a lot more into it, to the point of overfunding. So yes, the extra goes into an accumulation account that is technically an investment account.
The theory is that you’ll accumulate what the interest earns and that this amount will cover the cost of the policy. This accumulation of cash value is sold as a benefit of this type of policy. You might hear it framed as a policy that pays for itself, and then some. An advisor trying to be helpful may outline it as a way to start earning on your premiums to earn a profit.
However, this just isn’t how it turns out for real people. Ninety-nine percent of these policies are minimum funded, meaning people only pay the minimum to keep the policy alive. So they’re just paying premiums and never triggering any special benefits that they may have hoped to receive when they bought the policy.
Whole life insurance is a type of permanent life insurance policy. An important note about these policies is that permanent life insurance isn’t meant to be cancelled. While some people cancel early to get some money back, most won’t get close to how much they put into it.
In many cases, it’s best to purchase a term life insurance policy to give you affordable coverage for a defined period of time. With term life insurance, the premiums are much more affordable.
You could then invest the difference between these lower premiums and the higher permanent life insurance premiums, giving you a much better return on investment and more freedom.
In this example, if you were to look ahead 20 years, you’d find that someone who chose a term life insurance policy and invested the difference would end up in a much better situation.
An investment account allows you a high level of freedom and has value even if your situation has changed. It’s common for people’s life insurance needs to go down as they get older and their risk level goes down.
Once your kids grow up and you have no more dependents, and your mortgage is paid off, there is far more value in a TFSA or RRSP account where you have access to all your cash for whatever you want to do with it.
As long as you have money in the bank for end-of-life expenses, at this point, your need for life insurance is minimal or gone.
Some have features where you can take money out from what they call the investment portion, but when you do so, the money is treated as an outstanding loan, and you’ll be charged interest.
It’s easy to unintentionally run up a tab against your policy and create a situation where you owe money and interest.
How dramatic is the difference in policies between term and permanent life insurance? Let’s look at a 30-year term life insurance policy. If you compared the premiums to a permanent life insurance policy and invested the difference, you’d have hundreds of thousands of dollars saved in actual investments.
Let’s look at the pros and cons of whole life insurance to get a better idea of what this type of policy is all about.
There are certainly some benefits to whole life insurance policies for a small percentage of Canadians. If that’s true for you, we’ll be upfront about it and tell you.
As long as you keep paying for the policy, your beneficiary will receive your death benefit, even if you die at age 90. Some people like the feeling that this type of policy feels like lifetime coverage.
There is the potential for dividends to be paid in these policies and reinvested to earn interest. Over time, this can build some additional value for your family, though you’ll need to weigh the costs and benefits carefully.
Some of your policy premiums go into a tax-deferred savings account and accumulate interest, which can feel reassuring for people. It’s smart to ask for a clear picture of what this looks like for most people and if you’re likely to benefit from this element of whole life insurance.
Let’s have a look at some of the areas where you’ll want to exercise caution when considering whole life insurance.
Since the price is so much higher, customers often hold smaller permanent policies in the range of $100K - $150K, meaning Canadians are sacrificing their coverage amount to get a more extended duration for their insurance coverage.
The issue with that? It is seldom enough to cover debts such as your mortgage, line of credit, etc.
It means too many people are leaving their families unprotected at the time that it matters most, for instance, when their mortgages are at their highest and they have young kids.
Many people tell our advisors that they want the type of life insurance where they get their money back. But whole life insurance policies aren't meant to be cancelled and you won't get back the amount you put into it. So a better idea would be to invest your money instead.
You are technically allowed to borrow money from the “savings account" in your policy. Still, it usually takes a long time to build up enough savings within the policy to have a meaningful amount of money to take out.
If at some point the $200/month becomes too expensive, you might be forced to cancel the policy and you lose your coverage.
Yes, you can then apply for a new term policy, but at that point, it will be more expensive since you'll be older. And it might not even be available to you if your health has declined.
Paula is a 42-year-old marketing manager living in Edmonton, Alberta. She’s a single parent to two kids and wants to be sure they will be okay in the future if anything happens to her.
She’s concerned about financial protection, but also needs to make sure she can afford the policy premiums of whatever policy she chooses. She’s looking for life insurance coverage that will ease her worries about her family’s financial future.
Here are her options:
This example demonstrates the dramatic difference between monthly premiums for whole life and term life insurance even when the policies offer the same death benefits.
This also shows why people often end up cancelling these policies early.
If the premium becomes difficult to afford when your expenses are high, for example, when your kids are young, they might end up being something you can’t maintain throughout your entire life.
The takeaway: choosing whole life insurance would actually lower her family’s security, not raise it. She may end up having to cancel the policy, then try again when she’s older and her payments will be even higher.
It’s tricky to compare whole life insurance against traditional investments because these insurance policies are typically sold with a lot of promising language about potential returns.
This language can make whole life policies sound like a good investment, but for most Canadians, they are not.
Could some whole life insurance policies eventually benefit a policyholder? Yes, but most people never access these benefits.
It’s good to remain cautious about the fine print on permanent life insurance policies. It’s often sold as coverage for life, which sounds very secure. However, it’s common to find out that if you forget a few premiums, you could lose all of what you thought was your investment.
A policyholder might take a loan against their death benefit, using the policy as collateral. Then, when they pass away, the life insurance pays off this policy loan, which can feel like protection.
However, quick calculations always show that you’ll end up with more if you invest from the beginning. But, again, there are rare exceptions.
If you don’t have any more time to invest because you’re older and nearing retirement, there may be a point where whole life insurance is a reasonable option. It’s just not for most people at most points of their lifetime.
Whole life insurance is usually only a potentially good option for the top one percent of earners. If you have maxed out your TFSA, have money in offshore accounts, and still have funds to manage, only then should you possibly consider a universal or whole life policy.
Many people who have heard of whole life insurance know there is a way to cash out the policy. It can sound tempting to be able to access the cash value of a policy, but in reality, you’ll never access near the amount you’ve paid into it.
Here’s a good rule of thumb for assessing the cash value of a policy:
For most people, the wiser path is the term insurance policy and the investment account that allows them full access to the entire balance of money they have saved.
As a reminder: the cash surrender value of a whole life insurance account earns interest. This interest is a dividend from the life insurance company's yearly profits.
The growth rate is generally low compared to other investments because life insurance companies have additional expenses, like policy administration expenses and underwriting costs, that a pure asset manager does not.
Another challenge when thinking about this as an investment is that there are major penalties to withdraw your cash surrender value. Usually, the only way to collect the full cash surrender value before death is to lapse, or cancel, your life insurance policy.
Unfortunately, life insurance companies usually charge a fee to do this.
Most of the growth in your cash surrender value doesn't come until you've held the policy for 20–30 years! So if you surrender within the first ten years, it's unlikely that your cash surrender value will have grown significantly.
The cash surrender value of a whole life insurance policy earns interest.
This interest is a dividend payment from the insurance company’s yearly profits. These dividends could range between five and seven percent, not annualized, and before any management and other fees are subtracted. It’s unlikely that you’ll see a policy grow five to seven percent year over year.
The investment side of a whole life insurance policy will grow more, as there are advantages with registered accounts. However, you’ll pay higher fees with universal life and whole life insurance to invest your fees in funds you could invest in more affordably on your own.
Why do whole life insurance policies sound so attractive at first? An advisor can enter an interest rate into a life insurance calculator to illustrate a potential return to demonstrate what could be possible with a whole life insurance policy.
However, the interest rate environment will continually change over time. Just because an advisor uses a 10% interest rate to show potential return does not mean you’ll ever earn that return.
With whole life insurance policies, knowing what the numbers mean can be tricky.And that’s why we’re transparent that term life insurance policies with clear policies suit most people.
While most of our customers are best protected by a term life insurance policy, we’ll tell you if you happen to be in the percentage who are best served by a whole life insurance policy.
Transparency is built into how we do things, so we’ll always offer the facts so you can make the best decisions for your family.
For whole life insurance policies, we’d recommend you reach out to insurance providers such as Sunlife or Manulife for a range of permanent life insurance options.
For some people with very high incomes looking to take advantage of some of the tax-deferred components of life insurance, whole life insurance can make sense.
In fact, you’ll find a lot of advisors still offering whole life insurance policies, believing that on paper they can still show it as a worthwhile option.
You may hear some advisors ask if you’d rather rent or own your insurance, which triggers an emotional response in many customers. But for the vast majority of people, a term life insurance policy is the better option.
Let’s have a look at how whole life insurance and term life insurance compare.
Most people will benefit from what term life offers, while whole life insurance is a fit for only a tiny percentage of people.
So, what type of life insurance is best for 95% of people? Term life insurance. You'll get more coverage for 4x to 5x cheaper premiums, making it more likely you can keep your policy in place and enjoy the security and protection you need, while you need it.
With PolicyMe, you can get the most affordable insurance option on the market today.
Whole life insurance is rarely worth what people need to pay into it. The premiums are too high for most people to take advantage of any of the benefits it holds.
There is also simply too much risk that the premiums will become so high that people will not be able to keep the policies active or will cash out early, losing much of their benefit.
Whole life insurance is really only for the top one percent of earners. If you have maxed out your RRSP and TFSA, have money in offshore accounts, and still have funds to manage, only then would we advise considering a universal or whole life policy.
In the rare cases where whole life insurance is worth it, we’ll tell you it could be a fit for your situation and recommend an advisor you can contact to learn more.
Whole life insurance isn’t a scam, but it is often missold. It’s sold in circumstances where it won't perform its best, which doesn’t help the people who really need appropriate insurance coverage.
In Canada, it’s illegal to hold out a life insurance policy as an investment, so you should never see an advisor selling it as an investment vehicle. It exists only as a contract that money will be paid to beneficiaries upon the policyholder’s death.
The fact remains that you can use permanent life insurance policies as an investment vehicle, but they shouldn’t be advertised to people this way.
Some advisors may offer them as an option to high tax bracket individuals who are looking to supplement their retirement income, but it’s unlikely that this will pay off in the long run.
There simply are too many ways that people don’t end up benefiting from the features that might be used to sell whole life insurance policies.
While whole life insurance is not a scam, the biggest concern is that the chance of the policy paying for itself is very low unless written in that it’s guaranteed. You might find a policy that states in writing it will be paid up in 20 years.
However, if you’re pre-paying, you’re simply never gaining from the benefits that make whole life insurance sound attractive.
It could happen and advisors often mention it as a possibility, but it’s rare! They might outline a scenario where you pay $100/month for your policy and pay for ten years or pay $250/month for 20 years. You’ll be paying more for the privilege of not paying at some point.
This isn’t a popular choice because of the higher cost. For most people who want insurance, it’s much easier to manage a policy with premiums of $30 or 60 per month instead of what eventually becomes $200 or 300 per month.
Granted, if money’s not an issue, you may find whole life insurance appealing, but most people don’t fit into this category. If you calculate numbers and the interest earned is more than the monthly premium, you could technically keep paying into the policy to get it to grow more, and the death benefit will keep growing. It just doesn’t seem to benefit the vast majority of customers.
If you hold a whole life insurance policy with a cash value, you may be offered a feature that allows you to suspend or pause your premium payments if you’ve contributed more than the minimum in the past.
This pause in payments is often called a “premium holiday” and can sound attractive. However, because so few people ever pay more than the minimum, you’re unlikely to ever benefit from this feature.