Whole Life Insurance: A Guide for Canadians

^{This page provides general information about whole life insurance. All information provided here is for educational purposes only and should not be considered financial or legal advice. While PolicyMe does not offer whole life insurance plans, we offer permanent alternatives like Term to 100. If you would like to learn more about whole life or any other options for you, please feel free to reach out to an advisor.}
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What is whole life insurance?

Whole life insurance is a type of permanent life insurance that provides lifelong coverage and builds guaranteed cash value over time. 

A whole life insurance policy is a lifelong policy, so it stays active as long as you pay your premiums. That’s different from term life insurance which covers you for a specific period (usually 20-30 years) and then stops.

Whole life insurance, explained

Let’s start with five key things you should know to explain whole life insurance policies in Canada:

There are typically two main selling points for whole life insurance: 

• It’s lifelong coverage
• It acts as a vehicle for savings/investments

While whole life insurance has its uses (usually for high-net-worth estate planning), it’s generally not the right choice for the average Canadian family. Whole life insurance tends to be an expensive solution to problems that could be solved more efficiently with a term life insurance policy and independent investing.

Types of whole life insurance

Whole life insurance policies can vary by payment and cash generation style, so it’s very important to understand the differences between each policy structure. 

Participating vs. non-participating: Participating whole life policies may return dividends, which you can use as a small cash payout, to reduce your premiums, or grow your cash value. Non-participating (“non-par”) policies do not return dividends.

• What it is: Potential dividend growth depending on company’s performance
• Best for: Participating policies can build more cash value, but non-participating policies are simpler and cost less.

Limited pay (10-pay, 20-pay, paid-up at 65): Limited pay whole life policies allow you to pay higher premiums for a shorter period of time (10 years, 20 years, or at age 65), so your policy is paid up earlier while your lifetime coverage continues.

• What it is: Agree to pay higher premiums for a limited period of time while still enjoying lifetime coverage
• Best for: People with higher incomes may wish to pay off permanent coverage earlier and eliminate future payments while continuing to grow cash value.

Lifetime pay vs. single premium: Lifetime pay whole life policies require you to pay premiums for life. Single premium whole life policies are fully funded with one large upfront payment instead of monthly premiums, usually for a sum between $25,000 and $500,000.
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• What it is: Choose how to fund your coverage, either lower payments for life or a single, large payment upfront.
• Best for: Lifetime pay is more common and more affordable, but single premium policies may benefit wealthy Canadians seeking tax-advantaged cash value growth.

Pros & cons of whole life insurance

How do whole life insurance premiums work?

Whole life insurance provides lifelong coverage (i.e., a guaranteed death benefit) as long as you continue to pay the premiums. Here’s how whole life policies work when it comes to premiums:

• Premiums are fixed. This means that you’ll pay the same monthly rate over the course of the policy. As long as you pay premiums on time, your coverage remains active.
• Premiums are split. Part of the life insurance cost goes towards the coverage and fees, while the other part (the “excess premiums”) builds up the policy’s cash value. The exact amounts are not public, but this portion goes toward your cash value.
• Excess premiums are invested. Your insurance company will invest the cash, generating interest for your policy’s cash surrender value. 
• More cash value means growth. The greater the cash value component, the more interest is accrued, and the greater the policy value.

How much does whole life insurance cost? It depends heavily on your age, health, coverage amount, and policy type. 

Let’s consider a 35-year-old with a $250,000 whole life policy. The estimated monthly premium is between $150–$300, and these premiums are typically level or “pay for life.” 

For the first few years, this premium will begin to partially fund the policy’s future cash value via investments as well as the actual cost of insurance. Over the long term, the cash value of a well-funded whole life policy may grow higher than the total premiums paid due to tax-deferred investment growth and possible dividends.
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How aging changes your premium split

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 is whole life insurance good for? 

Whole life insurance is a good fit if you have unusual wealth management needs or you want a hands-off investment vehicle with a low but guaranteed minimum growth rate.

• High earners: You’re already maxing out other tax-deferred investment options and still have cash leftover to invest.
• Slow burn investors: You’re interested in a guaranteed minimum rate of growth, and you’re not relying on this policy to ensure your retirement or family’s stability.

Buying whole life insurance is more about tax-deferred growth than financial protection.

You can convert a term policy into a permanent policy in the future, if health issues crop up or you realize you’ll have a lifelong dependent (e.g., you have a disabled child). That’s true as long as it’s a convertible term policy. But meanwhile, you can save money with more affordable premiums.
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Be cautious about projections that overstate your returns

Advisors can sell whole life insurance by showing you a high potential rate of return on a life insurance calculator. But dividend scales and illustrated returns can change over time and aren't guaranteed, so your policy could earn less than projected.

Is whole life insurance a good investment?

For most Canadians focused primarily on investment returns, probably not.

^{*These figures are based on historic returns, but results will depend on the mix of investments chosen. Tax advantages vary.}

Why are whole life cash value policy returns so low? 

• Stable investments: Whole life investments are insurer-managed and these companies tend to invest more conservatively than individual consumers to ensure they can pay death benefits and fulfill their legal obligations.
• Partial returns: Policyholders only receive a portion, not the full amount, of the investment returns with a whole life policy. 

The long answer is that market-based investment options simply have higher historic rates of return. It can be hard for the average person to invest in the market while paying extremely high premiums for whole life policies.

Whole life investments (low single digits on average): The rate of return on the investment component of a whole life insurance policy is no greater than 4%. The average is 1 to 3.5%, as reported by The Insurance Pro. 

S&P 500 (10.72% average): The S&P 500 has historically offered an average annual return of 10.72% since 1957, including dividends. Even when adjusted for inflation, that's an average of 6.8% per year. 

RRSPs and TFSAs with market-based investment often mirror these returns (or slightly less, for more conservative investors combining stocks and bonds), offering potential growth that significantly outpaces whole life policies. 

A term life policy can cover your financial obligations during the time they exist, and it’s cheaper. This leaves you with extra cash to put toward other investment accounts with higher investment returns, with room in the budget to save for final expenses.

Cashing out a whole life insurance policy

You can tap into the cash value of your whole life insurance policy, but withdrawals are taxable.

Here’s a good rule of thumb for assessing the cash value of a policy:

• Compare with your timeline
• Add up the 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 a tax-advantaged account (TFSA/ RRSP) instead‍

If you cancel or surrender your policy, you’ll be entitled to get the policy’s cash surrender value. However, your beneficiaries and loved ones will not receive the death benefit when you pass away.

If you pass away while your whole life coverage is active, your beneficiaries will receive a guaranteed death benefit. But 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.” — Erik Heidebreicht, Life Insurance Advisor

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 you should think twice about the cash surrender value component:

• The only way to collect the full cash surrender value is to surrender or cancel your policy, in which case your beneficiaries won’t receive a death benefit. This can defeat the purpose of having life insurance.
• The growth rate for a whole life insurance CSV is often lower than that of other investments. This is because insurance companies charge admin fees and underwriting costs that an asset manager doesn’t.
• Withdrawing your cash surrender value incurs significant penalties, and getting funds from other types of investments is simple in comparison. If you use the cash value to cover premium payments later in life, it can also put your coverage at risk.
• Whole life insurance is a long game. Cash value often builds slowly during the early years of a policy and may take many years before it becomes substantial. If you surrender your policy before it matures, you won’t be left with much.

Other investment options

If you’re trying to grow wealth but you still need coverage to protect your family, then get term and invest the rest.

• Term life insurance means your family is protected. It covers your mortgage and your dependents’ financial needs at a lower monthly rate, leaving you more cash to invest. Before choosing a policy, use a life insurance calculator to estimate how much coverage your loved ones would actually need. That can help you compare whether affordable term coverage is enough or whether you have reasons to consider permanent insurance.
• Invest and save in registered accounts. Invest the money you saved on premiums to get higher returns. Consider the stock market and registered accounts like a TFSA or RRSP, with rates higher than the typical whole life policy.

Permanent life insurance policies do provide a guaranteed rate of return. However, other investments have higher rates of return. And the high cost of paying into the whole life policy throughout your life makes it less rewarding than other types of investments over the long term.

“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

Alternatives to whole life insurance (you have options!)

Besides whole life policies, there are four main types of life insurance policies for Canadians: universal life, term life, and mortgage life insurance. 

Term coverage is the most affordable option and the best fit for most Canadian families. PolicyMe has some of the lowest rates and best service in Canada.

Whole life vs. term life insurance 

Whole life insurance is best for high earners with unique wealth management needs.

• Higher income Canadians looking to expand their tax-deferred savings options beyond TFSAs and RRSPs
• Individuals seeking a hands-off investment vehicle with consistent accrued interest
• Those interested in leveraging their policy’s cash value for a policy loan or line of credit

‍Term life insurance is best for most Canadians who have specific, limited financial obligations.

• Individuals who need to provide financial security to their dependents over a set period of time (e.g., the duration of your mortgage or until your kids are independent)
• People who want affordable life insurance coverage (term policies cost up to 7.5x less than permanent life insurance products)

Overall, term coverage is generally the best choice for the average family. It’s affordable, customizable and easy to apply for, especially with a digital-savvy provider like PolicyMe that is delivering top-rated, best-in-class coverage to Canadian customers. 

Whole life vs. universal life insurance

Both whole and universal life insurance policies have these four things in common:

• Lifelong coverage
• High premiums
• Cash value component
• Tax-free death benefit

However, whole life policies have guaranteed premiums and a simpler investment component. Universal policies vary in cost and require active management for the cash value portion.

Universal life insurance is better-suited for high earners who want to manage their own policy.

• Higher income individuals who want to combine permanent coverage with investments
• People who are willing to put time into coordinating their investment portfolio
• Those who want flexibility with premiums and the death benefit amount

Read more: Term vs. whole life insurance

Best whole life insurance in Canada

The best whole life insurance options in Canada come from these three providers: Assumption Mutual Life, Canada Protection Plan, and Empire Life.

* Disclaimer: For each product, we display the approximate monthly cost for a 30-year-old female non-smoker seeking a whole life insurance policy with $50,000 in coverage.

Best whole life alternative: PolicyMe term life insurance

Term life is the best alternative to whole life coverage. It covers your family but gives you flexibility in your budget.

Smaller lifetime cost: Premiums are lower and stop after a set period of time, which means you save thousands over time while still protecting your family during the years they need it most.

More money to invest: Lower premiums mean you have more cash now, so you can invest to get higher returns for your family’s long-term financial stability.
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The bottom line: Is whole life insurance worth it?

For most Canadians, whole life insurance is not worth it because it is extremely expensive and provides unnecessary lifelong coverage instead of affordable temporary income protection.

Of course, whether whole life insurance is worth it or not depends on your individual situation and financial goals.

The money angle: Whole life policies tend to be more expensive than term life insurance due to the cash value component and lifetime coverage. Plus, the returns on the cash value are often much less than what you could earn from other types of investments. But it can help with tax-advantaged wealth transfer for high-net-worth individuals.

The coverage angle: Some Canadians may get value from whole life insurance, especially if there is a true need for permanent coverage whether due to estate planning or lifelong dependents. But for many people (particularly young, healthy adults who are on a budget), other types of life insurance and investments might be a better fit.

FAQ: Whole life insurance explained

Danise, A. (2024, December 16). Is whole life insurance a good investment? Forbes Advisor. https://www.forbes.com/advisor/life-insurance/is-whole-life-insurance-a-good-investment/

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/