What is Whole Life Insurance?

This page provides general information about whole life insurance. Take note that PolicyMe offers permanent life insurance coverage, not whole. All information provided here is for educational purposes only and should not be considered financial or legal advice.

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:

1. Whole life insurance policy is a lifelong policy that stays active as long as you pay your premiums.
2. The premiums for whole life insurance are fixed but higher than term life insurance due to the investment feature and longer coverage period.
3. A whole life insurance policy consists of two parts: the death benefit and potential cash value.
4. If you cancel, there will no longer be a payout for your family or loved ones, but you can withdraw the cash value (minus any fees and penalties). This is called the cash surrender value.
5. While whole life insurance can be used for estate planning and investment, it's often not the best fit 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 life insurance is one of the two main types of life insurance, with the other being term life insurance.

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

Whole life insurance work in Canada: what should I know?

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. As long as you pay your premiums on time monthly, your coverage stays. 
• In the early years of coverage, part of your premium payments go towards paying for the insurance and fees. 
• The another part of your premiums —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 cash value component, the more interest is accrued, and the more the policy is worth.

Good to know

As you age, your risk of passing away increases. Your premiums stay the same, but the distribution of your premium payments changes.

The cost of insuring you becomes more expensive, so the amount of your premiums that goes toward building your policy’s cash value will decrease.

Who should get whole life insurance?

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. A whole life policy could be a good option if: 

• You have permanent coverage needs, like a dependent with a disability.
• Some policies offer guaranteed cash value components as part of their plans.
• You have specific estate planning needs.
• You have maxed out your RRSP and TFSA contributions and want to take advantage of another tax-sheltered vehicle.
• You are setting up a trust and want to include your whole life policy as an asset.    

 “Whole life insurance might make sense for high-net-worth people that can afford the higher premiums, or people who have already maxed out their RRSP and TSFAs.” ^{— Erik Heidebrecht, Life Insurance Advisor}

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. Get a no-commitment quote to see just how much you can save in just a few clicks. No commitment required.

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 do whole life policiessav 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 life insurance 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 or loved ones.
• 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 and loved ones.

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

• 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 policy. 
• In this case, buying life insurance is less about financial protection and more about putting funds away for tax-deferred growth.

“I don’t always recommend life insurance as an investment. But for a higher net worth client we will often use life insurance as a savings mechanism for funds they wouldn’t otherwise use while living.” ^{— Susan Cruikshank, Senior Tax Manager at BDO Canada LLP}

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

» Read honest reviews of the top whole life companies in Canada.

The average rate of return on whole life insurance

The average whole life insurance rate of return ranges 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:

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 has guaranteed cash value. This means you will earn interest regardless of the insurer’s investment performance.

Take note

Advisors can sell whole life insurance by showing you a high potential rate of return on a life insurance calculator. But interest rates are variable and are not guaranteed, meaning that your policy could earn substantially less than advisor projections.

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 and loved ones 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.

For most people, the wiser path is getting a term policy and investing the rest – that way they get full access to the entire balance if they need to!

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 there better investment options than a permanent policy?

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 or loved ones.

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

“For the average Canadian, TFSAs and RRSPs are the better option for long-term financial health. You get similar tax benefits without underlying fees. And there’s more flexibility in how the funds are invested and withdrawn.” ^{— Susan Cruikshank, Senior Tax Manager at BDO Canada LLP}   

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

Most people need life insurance to provide their families and loved ones 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.

Alternatives to whole life insurance (You have options!)

There are four 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. 
• Participating life insurance, is another permanent policy type that enables policyholders to potentially receive dividends based on the insurance company's performance.
• 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.

Take note

It’s rare that a life insurance advisor would recommend getting mortgage life insurance. Premiums can cost up to 45 per cent more than a term policy and the payout mostly benefits the mortgage lender, not your loved ones.

Whole life vs. Universal life vs. Term: Life Insurance Comparison

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

Permanent life insurance policies have 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.

Whole life insurance is best for:

• High earners looking to expand their tax-deferred savings optiorns 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 a good investment 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, good rate. Term life insurance can cost up to 7.5 times less than permanent life insurance products. 

Pros and cons of whole life insurance, explained

Pros of whole life insurance:

Cons of whole life insurance:

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 or future generations 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. ‍

Bottom line: is whole life insurance worth it?

Whether whole life insurance is worth it or not depends on your individual situation and financial goals.

Whole life policies tend to be more expensive than term life insurance due to the cash value component and lifelong coverage. And the returns on the cash value are often less than what you could earn from other types of investments.

Some Canadians may get value from whole life insurance, like those who want guaranteed lifelong coverage, have maxed out their retirement accounts, or have a high net worth. But for many people, particularly if you're young, healthy, and on a budget, other types of life insurance or investment vehicles might be a better fit.

Next steps: Whole life insurance Canada

• 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 life insurance advisor if you are interested in whole life insurance 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 company. If approved, read over your policy and sign on the dotted line. 

FAQ: Whole life insurance explained

ECONOMICS. (n.d.). Canada Stock Market Index (TSX) - 2023 Data - 1979-2022 Historical - 2024 Forecast. https://tradingeconomics.com/canada/stock-market

Hodges, D. Surprising truths about your RRSP. MoneySense. https://www.moneysense.ca/save/retirement/surprising-truths-about-your-rrsp/

Rothery, N. 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-be/

Recommended reading: Best life insurance Canada