Whole Life Insurance, Explained (2023 Guide for Canadians)

Peer reviewed by
Erik Heidebrecht
,
Certified Life Insurance Advisor
In This Article

Key takeaways:

  • Whole life insurance is a type of permanent life insurance with a death benefit combined with cash value, that generates interest over time.
  • Whole life premiums can cost up to 7.5 times more than term life insurance plans.
  • Whole policies is best suited for high earners looking for tax-deferred savings opportunities.
  • There are limited benefits to whole for the average Canadian looking for financial security – a term policy might be a better fit for them.

Whole life insurance, explained

You may have heard the term “set it and forget it” when talking about whole life insurance. With a tax-free death benefit and guaranteed cash value growth, a whole life policy can seem like the best coverage option at first glance. 

There’s a lot to know about whole life insurance. But for starters, here are five key things you should know about whole life insurance:

what is whole life insurance

1. Whole life insurance coverage lasts your lifetime. The policy doesn't expire, as long as premium payments are made. 

2. Whole life policy premiums are fixed. But the cost is much higher than term life insurance premiums because of the investment component and the length of the coverage. 

3. Whole life policies are made up of two parts, the death benefit and the cash value potential.

4. The cash surrender value is the money you get if you surrender your policy. So if you cancel your policy you don’t get the death benefit, but can withdraw the policy’s cash value (minus any fees or penalties).

5. Whole life insurance can be used for estate planning and for investment purposes. But whole policies generally aren't well-suited for the average Canadian's financial needs.

What is whole life insurance?

Whole life insurance is a type of permanent life insurance, meaning that it provides coverage over your entire life. Permanent insurance is one of the two main types of life insurance, with the other being term life insurance.

Short on time? Life insurance advisors Erik Heidebrecht and Tobin Tuff take you through the fundamentals of whole life insurance in the video below: 

How does whole life insurance work in Canada?

Whole life insurance works by providing lifelong coverage (i.e. a guaranteed death benefit) as long as premiums are paid. 

  • Premiums are fixed, meaning that you pay the same rate over the course of the policy. 
  • In the early years of coverage, part of your premium payments go towards paying for the insurance and fees. 
  • The another of your premiums part—what is called excess premiums—goes into the policy’s cash value.
  • Insurance companies invest these excess premiums, generating interest for your policy’s cash surrender value. 
  • The greater the life insurance cash value component, the more interest is accrued, and the more the policy is worth.

Who is whole life insurance for?

Whole life insurance is for those with permanent dependents that rely on their income or for wealthy Canadians looking for tax-sheltering benefits.

Whole life insurance has a number of advantages, but the coverage isn’t fit for everyone. Whole life insurance could be a good option if: 

  • You have permanent coverage needs, like a dependent with a disability.
  • You have specific estate planning needs.
  • You’ve maxed out your RRSP and TFSA contributions and want to take advantage of another tax-sheltered vehicle.
  • You’re setting up a trust and want to include your whole life policy as an asset.

But because whole life insurance is pricier than term, it may not be the best for those on a tight budget or who only need coverage for a specific period (like while you pay off the mortgage or have young kids to take care of).

Most Canadians would probably benefit more from a simple and affordable term life insurance policy. Get a no-commitment quote to see just how much you can save in just a few clicks.

Is whole life insurance a good investment?

One of the biggest selling points of whole life insurance is that it has an investment component through the cash value. 

But how does whole life actually stack up against other types of investments? If you strip away all the talk promising significant returns, the reality is different. 

With the exception of specific circumstances, whole life may not be the best option for the average Canadian looking to invest.

Here are some reasons why:

  • In the fine print of most policies, you’ll find that if you miss even a few premium payments, your coverage and investments could be at risk of lapsing.
  • Opting for term can save you money and you can then invest yourself for potentially greater returns.
  • If the cash value hasn’t been withdrawn/reinvested into the policy when you pass away, the money goes to the insurance company, not the beneficiaries.
  • You can use your cash value as collateral to secure a loan, but any outstanding balance will be paid from the death benefit, meaning less money for your beneficiaries. 

But there are specific circumstances where whole life is worth it:

  • With whole life insurance, investing can be more hands off, with a guaranteed minimum rate of growth.
  • High earners who have maxed out other tax-deferred investment options can benefit from investing with a whole life insurance policy. 
  • In this case, having a policy is less about financial protection and more about putting funds away for tax-deferred growth and passing on wealth. 

Does whole sound like the right option for you? Click the link below for a comprehensive review of the best whole life companies in Canada, complete with pros and cons, quotes and more.

What is the average rate of return on whole life insurance?

The average whole life insurance policy has a rate of return ranging from 1 to 3.5 per cent, as reported by the Insurance Pro blog. At the end of the day, rates of returns can be more conservative. 

Here’s how it compares to the average rate of return for other investment types:

is whole life insurance a good investment

The earnings themselves are generated by the interest on the policy’s cash value, and are issued as an annual dividend payment (which can be withdrawn or reinvested). 

The amount of interest is dependent on the life insurance company’s profits. And it grows on a tax-deferred basis, meaning you only have to pay income taxes on the interest when you withdraw from the CSV.

Most life insurance providers do offer a guaranteed minimum rate of return, which ensures that your policy’s cash value will earn interest regardless of the insurer’s investment performance.

Can you cash out a whole life insurance policy?

You can access the cash value of your whole life insurance policy. If you withdraw from your whole life insurance funds, you’ll have to pay taxes

And even then, while it can sound tempting, you’ll likely 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:

  • Compare with your timeline
  • Add up annual premiums you’ll pay over that timeline
  • Calculate accumulations in the cash value along the way
  • Compare to how much you’d have if you put your money into traditional investments like an RRSP or TFSA instead

If you cancel or surrender your policy: you’ll be entitled to get the policy’s cash surrender value but your beneficiaries will not receive the death benefit when you pass away.

If you pass away: if your whole life coverage is active when you pass away, the insurer pays a guaranteed death benefit to your beneficiaries. The policy’s cash value (or what remains of it) goes to the life insurance company.

So is the cash surrender value a good investment?

The cash surrender value can be a good investment, but the limitations of whole life insurance policies create some challenges. 

There are four main reasons why the cash surrender value isn’t the straightforward investment some might think:

Are other investments a better idea than a permanent policy?

The short answer is yes: using your money to invest in other avenues is probably a better idea than spending on a permanent life insurance policy. 

Permanent life insurance policies provide a guaranteed rate of return, but the high cost of paying into a policy over the course of your life makes it less rewarding than other types of investment.

If investing is a priority, it can be more worth it (and cost-effective) to purchase a term life insurance policy that covers your mortgage and the financial needs of any dependents. 

The money saved on term life insurance premiums can then be invested elsewhere for potentially higher returns. 

Here’s how the investment potential of permanent life insurance compares with the combination of going with a term policy and investing the rest: 

whole life insurance investment

Most people need life insurance to provide their families with financial security should they pass away. Ideally, your coverage needs decrease once your mortgage is paid and children are financially independent.

So why continue to pay high premiums for coverage you don’t need? Instead, you can make contributions to other investment accounts, which have a greater degree of freedom and are unaffected by changes to your insurance needs.

You have some options: alternatives to whole life insurance

There are three other main types of life insurance policies available for Canadians, including:

  • Universal life insurance is a form of permanent coverage that gives you more control over where your premiums are invested. This means greater earning potential, but greater risk too. 
  • Term life insurance lasts for a fixed period of time, like 10, 20, or 30 years. If you passed away within the term, your beneficiaries get a tax-free lump sum payout. 
  • Mortgage life insurance is offered by banks and mortgage brokers. It’s designed only to cover your mortgage debt if you pass away before your home is paid off.

Whole life insurance vs. universal life insurance vs. term life insurance

All types of life insurance have the tax-free death benefit in common, but each has unique features. 

Whole life insurance has fixed premiums and a cash value component; universal life insurance is known for its flexibility; and term life insurance has some of the lowest premiums in the industry.

Let’s compare policy specs by type, along with who is best for each. 

term vs whole vs universal life insurance

Whole life insurance is best for:

  • High earners looking to expand their tax-deferred savings options beyond TFSAs and RRSPs. 
  • People looking for a hands-off investment vehicle with consistent accrued interest.
  • Those interested in leveraging their policy’s cash value for loans or lines of credit.

Universal life insurance is best for:

  • High earners looking to combine permanent coverage with investments. 
  • People who are willing to put time into coordinating their investment portfolio, since you decide where your excess premiums are invested.
  • Those who want flexibility in regards to premiums and size of death benefit. The more you pay into the policy, the more investment potential there is.

Term life insurance is best for:

  • Anyone looking to provide financial security to their dependents over a set period of time. For example, a term policy can cover the duration of your mortgage or until your kids are independent.
  • People that want life insurance coverage at an affordable rate. Term life insurance can cost up to 7.5 times less than permanent life insurance products. 

It’s a good idea to read up on term life insurance if that sounds like you! We’ve got you covered right here, click the link below:

The pros and cons of whole life insurance, explained

Like every type of insurance, whole life insurance has both advantages and disadvantages. Let’s take a look:

Using whole life insurance for estate planning

Whole life insurance can be a useful tool when it comes to estate planning. The death benefit can be used to pass wealth onto your beneficiaries with tax advantages. 

But again, for the average Canadian, the high cost of keeping a whole life insurance policy active doesn’t justify the estate planning and tax deferral benefits. 

A real-life whole life insurance example scenario

We’ve covered the fundamentals of whole life insurance, so now let’s take a look at how whole life insurance plays out for a real-life Canadian.

Introducing Paula, a 42-year-old non-smoking woman living in Ontario.

  • Paula is a single parent to two kids.
  • Her reason for wanting life insurance is to provide financial protection to her children in case anything should happen to her.
  • She’s also concerned about life insurance premiums fitting into her budget and life expenses.

So what should Paula do?

With whole life she can’t guarantee that she’ll always be able to afford the premiums, especially with two kids to look after. It could become a financial burden and put her coverage at risk (and the family's financial safety net, too.).

Term coverage is the clear winner. Paula can save upwards of $170 per month by opting for a term life insurance policy with the same death benefit. 

Of course, everyone’s insurance needs are different. You need to weigh out your own specific financial situation when choosing policy. Use our life insurance calculator to get an accurate estimate of the amount of coverage your family needs!

Next Steps

  • Evaluate your own financial goals and budget to determine whether whole life insurance or term life insurance would be a better fit.
  • Use a life insurance calculator to figure out how much coverage you need.
  • Speak to a tax or insurance advisor if you are interested in whole life for tax purposes.
  • Compare premium quotes from different life insurance companies to find your ideal price-to-coverage policy.
  • Submit your application for life insurance. If denied, try another insurance provider. If approved, read over your policy and sign on the dotted line. 
  • Just like that, you’re insured!

FAQ: Whole life insurance explained

Are whole life insurance policies a scam or a gimmick?

Whole life insurance isn’t a scam, but it is often mis-sold. 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 recommend 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.

What is the catch with whole life insurance?

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. 

Do you ever stop paying for whole life insurance?

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 10 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. 

What is a “premium holiday”?

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. 


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Hodges, D. (2015, February 26). Surprising truths about your RRSP. MoneySense. https://www.moneysense.ca/save/retirement/surprising-truths-about-your-rrsp/Roberts, B. (2021, August 15).

Rothery, N. (2018, July 31). Why your returns are a lie. MoneySense. https://www.moneysense.ca/save/investing/stocks/why-your-stock-market-returns-are-a-lie/TRADING

What can you Expect your Whole Life Insurance Rate of Return to be? The Insurance Pro Blog. https://theinsuranceproblog.com/what-can-you-expect-your-whole-life-insurance-rate-of-return-to-

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