Advantages and disadvantages of whole life insurance

The main purpose of life insurance is to provide for your loved ones when you die. Whole life insurance does that, and also becomes a cash asset over time. But it might be years before you’ll be able to make the most of its living benefits.

Advantages of whole life insurance

These are the main perks of taking out a whole life insurance policy:

• It provides lifelong protection. Unlike term life, whole life insurance lasts a lifetime.
• It accumulates cash value. Whenever you pay a premium, part of it goes toward the cash value portion of your policy — which grows on a tax-deferred basis. Once you’ve built up enough cash value, you can borrow against your policy. The interest rates are typically low, but you may be taxed. In this way, whole life insurance functions as an emergency savings account.
• It has a minimum rate of return. Even if the market dips, the cash value of your policy will still earn the guaranteed interest rate set by your insurer. Since it’s not subject to the ups and downs of the market, whole life insurance can be a solid investment.
• It offers a financial safety net for you and your beneficiaries. During your lifetime, you can take advantage of ‘living benefits,’ such as the ability to take out withdrawals or loans against your policy to pay for large expenses or fund your retirement. And when you die, your beneficiaries will receive a guaranteed death benefit.
• It has predictable premiums. With whole life, the premiums stay the same, so you know exactly how much you’ll pay each month.
• It has the potential to earn dividends. If you’re with a mutual life insurance company, you might earn dividends based on their profits. You can then cash in the money, use it to pay your premiums or boost the cash value of your policy.
• It can unlock a range of riders. Depending on your provider, you might be able to dress up your policy with a longer list of riders, such as a critical illness rider.
• It can help with estate planning. If you’ve built up a large estate, you can use a whole life insurance policy to set up a trust — and leave your heirs the funds they need to pay estate taxes. The CRA doesn’t consider death benefits as taxable income. So generally, this money isn’t taxed. Likewise, if you have a child with special needs, a whole life policy can also fund a special needs trust to pay for your child’s care when you’re gone.

Disadvantages of whole life insurance

Like all insurance products, whole life insurance has its downsides:

• It’s expensive. Since permanent policies offer lifelong coverage, they come with a significantly higher price tag.
• It’s not as flexible as other permanent policies. Unlike universal life insurance, for example, you can’t increase or decrease your coverage if your circumstances change. You can’t adjust your premiums, either. If you foresee income fluctuations, you might want to explore a universal life insurance policy.
• It can take a long time to build cash value. In the first few years, most of your premium pays for the insurer’s fees and commissions, and a small percentage goes toward your cash value. This means it might take 10 to 15 years to accumulate the cash value you need to start taking out loans against your policy.
• Its loans are subject to interest. If you decide to borrow against your policy, your insurer will charge you interest. And if you don’t pay it back before you die, they’ll reduce the death benefit and your beneficiaries will receive less money.
• If you don’t use it, you’ll lose it. Read through your policy carefully because in some cases you may have to use up the cash value of your policy before you die, or else you’ll lose the money you’ve invested. In these instances, your beneficiaries won’t get access to your cash value.
• It’s not always the best investment choice. Depending on the market, the interest you earn on the cash value might be less than what you could get with other investments, like with an RRSP.

Myths about whole life insurance

These are some of the most common myths about whole life insurance.

• It’s a great way to diversify your investment portfolio. While whole life insurance has an investment component — the cash value — it’s primarily a life insurance product. Each insurer sets a minimum rate of return on the cash value, which can be relatively low. If aggressive investing is your goal, you may want to look into other investment vehicles.
• It’s perfect for retirement planning. Sure, you can dip into the cash value portion of your whole life policy to fund your retirement. But it shouldn’t be your only source of cash. To plan for a comfortable retirement, it’s a good idea to funnel more of your savings into your RRSP and TFSA accounts.
• It only pays out when the policyholder dies. With many providers, you can opt into riders that will let you withdraw money from your policy in certain situations. For example, if you’re diagnosed with a terminal illness, an accelerated death benefit rider allows you to cash in part or all of your policy to pay for your medical expenses. Similarly, a critical illness rider steps in if you develop a serious health condition. When you die, your insurer will likely deduct any withdrawals you made from the death benefit.
• The beneficiary receives the death benefit, plus the policy’s cash value. This is where whole life insurance gets complicated. Most insurers have a use-it-or-lose-it attitude toward cash value. If you don’t withdraw it during your lifetime, it goes back to the insurer when you die. That said, some insurers offer a death benefit along with an added cash value benefit.
• The premiums will rise as you get older. When you purchase a whole life policy, your premium is locked in for life. This means you’ll pay the same amount every month, even if your health starts to decline. To score the best possible premium, you’ll want to apply for coverage as soon as you know you need it. Insurers reserve their top rates for young, healthy applicants.
• You can’t borrow against your whole life policy. Once you’ve accumulated enough cash value, you can borrow against your policy. You can use that money for any reason, and you won’t be penalized for withdrawing it before a certain age like you would with a RRSP. But remember that if you die before you’ve paid back the money, your insurance company will reduce the death benefit by the amount it’s owed.

Compare life insurance companies

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Name	Product	Types of Insurance	Coverage Range	Issue Ages	Medical Exam Required	Province Availability
PolicyMe Life Insurance		Term Life, Critical Illness	$100,000 - $5,000,000	18 - 75	No	AB, BC, MB, NB, NL, NS, ON, PEI, QC, SK, YT, NT, NU	Get fast and affordable term life insurance. Personalize your policy details and get an estimate price within seconds. No phone call, meeting or paperwork required. Get an instant decision.	Get a quote More Info	Compare	loading Fetching your data...
RBC Life Insurance		Term Life	$50,000 - $1,000,000	18 - 70	No	AB, NS, ON, PEI	Select from two unique RBC term life insurance plans to get flexible and affordable coverage that suits your lifestyle and budget. Get a free quote through Walnut.	Get a quote More Info	Compare	loading Fetching your data...
PolicyAdvisor		Whole Life, Term Life, Universal, No Medical	$25,000 - $25,000,000	18 - 75	No	AB, BC, MB, ON	PolicyAdvisor is a digital life insurance brokerage that has partnerships with 20 insurers in Canada.	Get a quote More Info	Compare	loading Fetching your data...

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How to make the most of your whole life insurance policy

To get the most value out of your policy:

• Purchase a policy early. The younger and healthier you are, the cheaper your rate would be. To save hundreds — or even thousands — of dollars over the life of your policy, apply for coverage as soon as you’ve decided to.
• Only buy the coverage you need. A whole life policy is an investment product — but it’s not your only option. For a balanced financial plan, aim to take out a policy that protects your assets and provides for your family, and then funnel the rest of your funds into retirement accounts or other investment vehicles. To work out how much life insurance to buy, think about your financial obligations now and in the future.
• Pay back any loans against your policy. You’re free to borrow against your whole life policy as soon as you’ve built up enough cash value. However, if you fail to repay those loans, your insurer will dip into the death benefit — which means your beneficiaries might not receive as much money as you intended.

Bottom line

Whole life insurance offers permanent protection, plus the opportunity to invest. It’s ideal for people who want to turn their policy into a cash asset and those who want to use it for estate planning purposes. However, whole life insurance is expensive and it can take a long time to build cash value — and start taking advantage of the ‘living benefits.’

Read through our comprehensive guide to compare insurers and learn more about life insurance products to make sure you get the right option for your needs.

Frequently asked questions

• How can I build cash value faster?

  Ask your provider if they offer accelerated payment structures. Some insurers will let you pay off your policy up front or over the course of several annual payments. After that, any money you contribute will go straight to the cash value portion of your policy.

  Alternatively, you can choose to pay an additional premium on top of your regular premium each month.

• Are all whole life policies permanent?

  Yes. Some policies may reach a maturation, like when you turn over 100 years old, where you are no longer required to pay premiums but your beneficiaries will still receive the payout upon your death.

• Do I need to take a medical exam?

  Usually, yes. Some providers offer simplified issue and guaranteed issue policies, which don’t require a medical exam. But they are expensive and coverage is usually capped at small amounts like $50,000, so they’re typically marketed as final expense policies for seniors.