What is Whole Life Insurance and How Can it be a Good Investment?

The increasing volatility of the economy has led to investors finding appeal in an “old workhorse”. 

In the era of high economic uncertainty, some Canadians are looking to whole life insurance as a sustainable and reliable investment option. While this type of insurance may not be known by all, it’s not new. In fact, whole life insurance is an “old workhorse”, that’s been around for a long time.

Whole life insurance is a tax-efficient investment alternative for many Canadians and can be very appealing to those looking to diversify their portfolio. 

Whole life insurance has the potential of generating income that provides funds while you are living on your investments during retirement without having any upfront costs! Sounds too good? Well, there’s even more: whole life also offers an element of protection from risk as well!

Why Whole Life Insurance Is a Good Investment:

• Tax advantages;
• Steady growth;
• Important estate benefits;
• Accumulating cash value that cannot decrease as long as premium payments are met.

TIP: Unlike other accumulation policies such as universal life insurance, mutual funds and equity investments, the cash value and divident value of a whole life policy cannot decrease as long as you are making your premium payments.

What Is Whole Life Insurance?

• It is permanent life insurance protection – meaning it won’t expire before you do! (note this is different from term insurance… don’t compare apples to oranges when considering policy advantages.

• It has level guaranteed premiums for the life of the policy. (Shorter premium paying periods are often available.) ((TRANSLATION: You will have a guaranteed death benefit and your premiums will be guaranteed to be the same/constant. So you DO NOT need to worry about premiums skyrocketing when you’re older (and retired, which double sucks).

• It has tax-advantaged cash value growth. (and note that the insurance part of the death benefit is tax-free. So this is only on the investment portion).

• It can pay annual dividends (participating whole life). This can be used to increase the insurance (sometimes called paid up additions), or choose an alternate.

• Dividends can be taken in a number of different ways but the option most often selected to provide the maximum tax-advantaged growth is “paid-up additions.”

• The assets of the participating pool are professionally managed and largely in fixed-income investments. Management fees are extremely low (some as low as 0.07% management fee), and the funds have very little volatility.

• This combination of guaranteed cash value and the non-guaranteed portion from the dividend account grows tax-deferred. At death, it is paid to the beneficiary tax-free.

Can I Access the Cash Value in a Whole Life Insurance Policy?

Yes! During the lifetime of the person that is insured, the cash values in a whole life policy is accessible through a partial or total surrender, or a policy loan.

It’s important to understand that withdrawing can lead to income tax being payable, however, an alternative to this is using the policy as collateral and taking a loan from a third party lendor instead. If structured properly, the interest is then tax-deductible.

Do Whole Life Policies Compare Favourably to Long Term, High Yield Bonds?

Yes again! Most portfolio managers recommend that it’s prudent for an investor to have a diversified portfolio, including a significant portion in fixed-income investments such as bonds, term deposits, etc. Many suggest a range of one-third to 40% of an investment portfolio be this type in order to have balanced growth.

Including participating whole life in your portfolio can produce some significant results and reduce overall volatility. Whether investing as an individual or via a corporation, the significant results that can be achieved by using Participating Whole Life are worth investigating.