What is Whole Life Insurance – The Basics

Whole life insurance is permanent insurance offering coverage for your whole lifetime, that has the added benefit of building a cash value you can access for funds pre or post retirement. Whole life policies are an excellent way to protect and shelter assets so they can be passed on to future generations.

Premium Payments
There are several ways to structure the premium payments for a whole life policy: The most common in our experience is life pay (meaning you pay premiums your entire life and when you pass away there will be a one-time payment to your listed beneficiaries), with many companies offering 20 pay where you pay premiums for 20 years and then the policy is considered “paid up”, and limited pay where you pay premiums for 10 years and the policy is considered “paid up”. Keep in mind the shorter the premium payment period the more expensive the premium will be.

Guaranteed Cash Value
One of the incredible benefits of a whole life insurance policy is that you build a guaranteed cash value over time as a portion of your deposits go to pay the cost of insurance and the rest go to build the cash value. This cash value acts as an investment like savings account that you can withdraw money from it in the form of a policy loan.

Tax Advantages
The cash value will grow tax deferred much like in a registered retirement savings plan, the big difference is when you want to withdraw that money rather than withdrawing it directly from the policy and incurring some taxable gain, you will structure the withdrawal as a policy loan therefore incurring no taxable gain and requiring no approval from a bank.

Participating vs non-Participating Policies
When setting up a whole life policy you typically have two options, participate in dividend payments or don’t. A policy that is non-participating will not receive any dividend payments from the insurance company and is essentially the discount version of a whole life policy, the premium will typically be less but the policy will also be less valuable as an asset. Think of a participating insurance policy as an investment and insurance policy wrapped in one. You will participate in the annual dividend payment of the insurance company you choose to place your policy with and will benefit from an increased cash value.

Benefits of Whole Life Insurance
1. Guaranteed Cash Value are one of the big benefits of a whole life insurance policy. The guaranteed amount will be set out at the time you put the policy in place
2. The premium payments are fixed.
3. When the policy is structured to be participating you will benefit from annual dividend payments you can use to buy paid up insurance, add to your cash value, or withdraw from the policy.
4. When you decide to retire you can withdraw the cash value by taking a policy loan from the company the policy is placed with, or by getting a third party loan secured against the cash value.

Draw Backs of Whole Life Insurance
1. Whole Life policies are more expensive than a Term Policy as the intent is at some point the policy will make a death benefit payment to your beneficiaries and, the insurance never expires.
2. These policies have many ways they can be set up and it is very important to make sure you work with your insurance expert closely to ensure the policy is set up properly to avoid taxation and work for you the way you intend it to.
3. Compared to the stock market in recent years (as of 2022) the return on a whole life policy will be relatively small.
4. Dividends are not guaranteed and change over time, if they increase this will be good for the growth of a participating policy, if they decrease this will negatively affect your cash value growth and you may not get the value out of the policy you expected.

Summary
Adding a whole life insurance policy to your portfolio can create opportunities for tax efficient income before and during retirement, but need to be reviewed carefully to ensure they are structured correctly as this is a complex product. Whole Life policies are also used to create inter-generational wealth by listing your children as beneficiaries, when you pass away the money will transfer to them on a tax-free basis. Adding a whole life insurance policy to your portfolio can be a complex strategy and is not right for everyone.

Authorized distributor for The Canada Life Assurance Company, Equitable Life Insurance Company, The Manufacturers Life Insurance Company, Pacific Blue Cross, and Desjardins Financial Security Life Assurance Company. Manulife & Stylized M Design, and Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

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