How does whole life insurance work? Definition & sample quotes

What is whole life insurance? Whole life insurance is a type of life insurance that covers you for your lifetime and has a fixed premium. A key feature of whole life insurance is that these policies have a cash value/investment component. What this means is that part of the premium you pay covers the cost of your insurance, and the other part of your premium is diverted into an account, like a savings account, that in some policy types is invested.

Nailing down the ins and outs

Whole life insurance in Canada offers some features that are very attractive. Lots of people like to operate on a budget, so things like variable premiums can be a bit scary. Luckily, whole life insurance allows you to set your premium when the policy is established and they usually offer a guarantee that the premium will not change. It’s also great that these policies offer a cash value aspect that you can borrow against or invest to generate more value. Some people eventually use their cash value to pay their premium later in life, if they start the policy early enough in life.

There are three common types of whole life insurance:

• Traditional
• Interest Sensitive
• Single Premium

Traditional Whole Life Insurance

This type of whole life insurance provides a minimum rate of return on the cash value aspect of your policy. Again, this type of policy is great for people who may be more risk-adverse, and who want solid numbers to bank on.

Interest Sensitive Whole Life Insurance

Similar to how a variable rate mortgage would work, this type of policy gives you a variable rate on the cash portion of your policy. This type allows for some flexibility in terms of increasing coverages without increasing your premium, but it is market dependent.

Single Premium Whole Life Insurance

This allows you to purchase a policy up front with a large sum of money. You will still accrue cash value and get tax benefits with this type of policy, but you won’t have to deal with monthly payments.

It is more expensive

Because you aren’t simply purchasing a cut and dry insurance policy, but rather buying insurance and creating an investment, you pay more. You also get the benefit of tax-free dividends, tax savings while you are alive and tax savings for your estate. This will also cover you for your entire lifetime (unlike term), with no follow up medical exams. In the end, you are getting a lot of bang for your buck. The return on investment (ROI) you will see with a whole life insurance in Canada is much lower than what you would get from a typical investment, but it’s important to remember that the most important aspect of your whole life insurance policy is the actual coverage it provides, not the money you could make from it.

Ask questions

When going after a whole life insurance quote, don’t be afraid to ask your broker or agent a lot of questions, and be specific. Find out what sort of management fees you will be looking at for the investment portion of the account. You don’t want fees to take too big of a chunk out of your cash value. Ask about the current state of the market, the type of funds your cash value will be used to buy into, and how whole life insurance policies have fared over recent years. Can they show you some statistics or other literature about it?

It’s not one-size fits all…

There are some situations where a whole life insurance policy would be very advantageous. Here are just two scenarios:

1. You are young: Seems like a simple qualifier but when you are young and in good health, getting a whole life policy will protect you forever and cover you in any unforeseeable future health situations. Just because you are healthy now doesn’t mean you always will be. It also gives you a “forced” savings opportunity, allowing you to build wealth without thinking about it. The younger you start your policy, the more cash value you build.
2. You have too much money: Seems like a wonderful dream, but the implications of having or making a lot of money can be huge when it comes to taxes. Purchasing single-premium whole life insurance can provide a tax shelter and tax-free dividends.

If you are interested in learning more about whole life insurance in Canada, or would like to get whole life insurance quotes from a broker, contact LSM Insurance. We work with more than 15 different insurers to find the best policies for you and your loved ones.