Whole Life Insurance is part of the family of permanent life insurance products. This means that premiums are generally life-level, unlike term life insurance premiums that increase over time.
(If you are looking for a primer on the types of life insurance available, please see our article on types of life insurance)
Whole life insurance is a permanent life insurance product which means it lasts a lifetime (it never expires). It has two main attributes which are the death benefit and the cash value. Death allowance starts at a specified number chosen by the policy owner (e.g. $ 100,000). This is the amount that is paid to your beneficiaries, tax free in the event of death. The cash value starts at $ 0.00. As the policy premiums are financed over time, both the death benefit and the cash value will increase.
Whole life insurance premiums in the first years of the policy outweigh the insurance costs of the company. Later in life, life-long premiums, as they generally remain level, will actually be lower than the company's insurance costs on an annual basis. What you are actually doing is overpaying the true annual insurance cost in the first few years of the policy. This excessive funding is then saved or reserved within the policy (called cash value). Later, when the costs exceed what you are paying in prizes, there is money from the early years to make up for that cost differential. Pay more now to pay less later.
Now, if you cancel the policy after a period of time, companies typically refund part of that overpayment (cash value). This is known as cash value or cash redemption value. It is important to note that most of that cash value will be a refund of excess premium payments, especially in the early years.
In the past years, many insurance companies were mutual. Mutuals generally reported an unsecured dividend to participating policyholders. These dividends were then used to automatically create various other options including small paid insurance units, or to increase the value in cash or one of the 2 or 3 other options. Dividends were designed to be used to pay premiums in subsequent years. In the 1980s and later, distributed dividends did not meet previous projections, and as a result, many policy owners had policies that they assumed would receive premiums that were paid, but in reality they did not. Consumers have therefore initiated various lawsuits against insurance premiums and have been successful with these cases.
The chart above shows an example of a full life insurance policy for a 30 year old, non-smoker, for $ 100,000 coverage. Death allowance starts at $ 100,000. Cash value (cash redemption value) starts at $ 0.00. Each year, the death benefit and the cash value increase until they are 100 years old. In this example, the death benefit has grown to nearly $ 650,000 in 100 years (started at $ 100,000).
For whom is whole life insurance designed?
Whole life insurance is a truly unique product designed for certain people. We highly recommend talking to a life insurance broker to determine if whole life insurance is right for you. You should be in a very strong financial position before considering buying a full life insurance. Your retirement should be fully funded and you should have a surplus of investments.
Many people purchase full life insurance to cover their final expenses (funeral expenses), real estate / planning expenses, inheritance expenses, death taxes, inheritances, corporate succession, etc.
Peace of mind knowing that your beneficiaries will receive a lump sum, tax-free in the event of death
The policy never expires and payment is guaranteed, regardless of your age
The premiums (cost of the policy) are fixed
The policies are highly customizable which allow you to make sure it fits the needs of you and your family
Permanent life insurance
Whole life insurance is one of the few permanent life insurance products available in Canada. If you are interested in learning about other permanent life insurance products, use the links below.
Whole life insurance
Universal life insurance
Term to 100 life insurances
Full-life insurance is still available today (you can get a free online quote immediately by clicking Free Quote at the top of this page), however permanent insurance products are available today that offer better guarantees at a lower cost. Term 100 and Universal Life are two of these options.
When buying life insurance it is very wise to seek independent and impartial advice from a life insurance broker who represents all life insurance companies in Canada. Feel free to contact us by email or phone at 1-877-344-4011 to speak to one of our authorized brokers and determine which product is best for you and your family.