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Whole life insurance

10/17/23

What it is:  Whole life insurance is a type of permanent life insurance. That means that it’s intended to be put in force, and the policy kept until you pass. By contrast, term life insurance has premiums that are level for a period of time (often 20 or 30 years) after which it’s expected that you would cancel the term policy.

Common uses of Whole Life Insurance

 Whole life insurance is the appropriate type of life insurance for needs that are permanent – they exist no matter how old you are when you pass. Examples would be estate creation or final expenses.

Estate creation is when you choose to leave a sum of money to your beneficiaries. This is often used as a gift upon our passing, in effect we are ‘creating an estate’.

Final expenses include such things as clearing any remaining debt upon your death and paying for funeral and internment costs. 

Both of these are expenses incurred when we pass – no matter how old we are when we die. As a result, we would expect to keep a whole life policy no matter how old we are when we pass – thus making this permanent life insurance.

Variations on whole life insurance

Guaranteed whole life:

Guaranteed whole life insurance consists of premiums that are level for life with coverage that is level for life. In addition, there would be guaranteed cash values available if you cancel the policy prior to passing (see below for info on cash values). Guaranteed whole life is a suitable choice if you’re looking for low cost permanent life insurance.

Quick pay whole life:

 Quick pay whole life (guaranteed) consists of coverage that is level for life, but the premiums are compressed into a shorter timeframe. Typical premium payment periods would be 10 or 20 years. After the premiums are paid for that timeframe, there are guaranteed to be no further payments for your lifetime.

Non-guaranteed whole life:

Non-guaranteed whole life insurance often depends on ‘dividends’, or annual refunds of premiums. These dividends are determined annually by the life insurance company and are not guaranteed (nor is it guaranteed that they will pay any dividends at all).

These types of policies that are dependent on non-guaranteed elements often result in premiums, time-frames, and cash values that are also not guaranteed. i.e. you could purchase a quick-pay policy where the premiums are to be paid up in 20 years. But if that timeframe is dependent on non-guaranteed elements, you could find out that in 20 years the premiums are not paid up and in fact you’re required to continue to pay premiums for life in order to keep the policy in force. 

As a result, non-guaranteed whole life insurance is not suitable for most Canadians. If the purpose is to guaranteed final expenses or an estate for your beneficiary, then purchasing a life insurance policy where the premiums or the coverage is not guaranteed is counterproductive as it could leave you without life insurance when you’re older.

Whole Life Insurance cash surrender values

Whole life insurance policies have a cash surrender value. This is an amount refunded to you in the event of cancelling your policy. Unfortunately, these cash values are also counter-productive. If you’re purchasing a life insurance policy and intend to keep it for your lifetime until you pass, then the benefit of cash values available if you cancel aren’t practical. If you’re not going to cancel the policy, then the cash values are of no use. If you are planning on cancelling the policy, then term life insurance will be less expensive.

Other attributes and sales strategies surrounding cash values, such as borrowing, are outdated and no longer practical with today’s whole life policies. (i.e. in years past, some whole life policies guaranteed that you could take a loan from cash values at a rate of about 3%. When interest rates went to 18% years ago, it made sense to take a loan at 3% and invest elsewhere. Those guarantees of loan rates are not found in today’s whole life policies, nor are we in an 18% interest rate environment.).

Therefore, most Canadian consumers should not be focusing on cash surrender values of a whole life policy. You might also look at Term to 100 life insurance which is permanent life insurance with guaranteed level premiums and level coverage, but without cash surrender values. These policies generally have lower premiums than whole life policies.

Summary

 If you’re seeking final expense life insurance, then whole life insurance is a reasonable starting point, but you should also consider Term to 100. You should for the most part ignore cash surrender values from consideration as they imply that you will be cancelling the policy in the future.

 Alternative

In some cases, whole life and cash surrender values do make strong financial sense. Strategies such as Insured Retirement and Estate Creation can be great investments. However a good rule of thumb is that these strategies only make sense if you have all your RRSP’s and TFSA’s fully maximized and expect to have more money in retirement than you are likely to spend while still alive. If you don’t meet these conditions, these strategies almost certainly are not appropriate for you.