whole life insurance
What Is Whole Life Insurance?
It is a type of permanent life insurance. It has an investment component that increases in cash value as well as the death benefit.
How Does Whole Life Insurance Work?
The premiums for the insurance policy are set and do not change. They are paid for a specific number of years, such as 10 or 20 years, or until the age of 100. After the payments are finished, the policy stays in place for the insured’s lifetime.
They policy may also build cash value, an investment that is tax-deferred. It increases over time, even if the payments are completed.
What Are The Benefits of Whole Life Insurance?
A whole life policy:
- Lasts a lifetime and does not expire;
- Does not need to be renewed;
- Can build cash value that is tax-deferred;
- Cannot be canceled by the insurance company.*
* The owner of the policy (i.e. you) can choose to surrender the policy and cancel it, however, the insurance company cannot (unless you fail to make required premium payments).
Is This Type of Insurance Right For Me?
Whole life insurance policies can be a great option for those that need permanent insurance. Always speak with an insurance advisor you trust and decide what is the best choice for you and your financial goals.
How Can Whole Life Insurance Be Used?
Insurance planning can help to meet a variety of financial goals. Some of the reasons people choose whole life insurance is for:
- Earmark a source of funds to cover immediate, final expenses, such as a funeral;
- Replace any future income that is lost if you die before retirement;
- Offset taxes which become payable on your RRSP when you pass away;
- Reduce the impact of taxes that are owed on assets in your estate that are taxable. For example, capital gains;
- Use the cash value that has accummulated in your policy to top up your after-tax retirement income;
- Transfer wealth to your beneficiaries in a tax efficient way;
- Leave a legacy gift by naming a charity that is important to you as the beneficiary (or one of the beneficiaries)
Whole Life Insurance
Meaning of life aside (as that’s probably too long of a read here), there are a few key words that can have a big impact on the pricing of life insurance products:
It’s kind of like if you were considering a new car purchase. Would you want to lease, or purchase?
Do you want a Honda Civic, or Range Rover?
There are lots of ways of getting a vehicle so you can drive from point A to point B, but some may be more suited to your budget and preferences.
Buying life insurance is like that too. Whole life insurance is kind of like buying a BMW.
Do you have a large mortgage you need to cover? How many dependents do you have? Do you want coverage for a specific period of time (i.e. until your children are grown up and done school), or do you want coverage to will last even if you live to be 100?
What is a "20 Pay" Policy?
A 20-pay policy is a type of whole life insurance in which all of the premiums are paid over a twenty-year prior. At that point, the insurance remains in force for the rest of the insureds life and continues to grow in its’ cash value.
Other payment options include: Paying for 10, 15, 20 or 25 years, or until age 65. Some companies even offer an option as quick as 8 years.
What is the Average Cost of Whole Life Insurance By Age?
The average cost varies of whole life insurance by age refers to a ‘standard’ rate. This is based on typical risk and is higher for men than women. The standard rate for a person may increase or decrease, based on health and lifestyle.
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Meet Jack: 42 year old male
(fairly healthy and does not smoke)
$101.16*/month for Jack's lifetime.
Policy: cash value + death benefit
+ dividend options
Fully Guaranteed, Non-participating
$94.68*/month for Jack's lifetime.
Policy: cash value + death benefits;
Participating policy; paid for 20 years only
$130.82*/month for 20 years.
Policy remains in force for Jack's lifetime.
Fully guaranteed: cash value + death benefit + dividends
* The thing about whole life policies: it is challenging to compare one company to another. Why? Insurance companies project estimated cash values and dividend performance differently. Some companies include additional benefits at no additional charge and this is not reflected in the basic quotes.
Does Whole Life Insurance Ever NOT Pay?
Life insurance policies are very strong contracts that ensure that contracts taken out in good faith with accurate information are paid out fairly and in a timely manner.
In fact, over 99% of all life insurance contract in Canada do pay out. There are a couple of restrictions on benefits that make up that tiny, less than one percent:
- Suicide. If an insured person commits suicide within the first 2 years that the coverage is in place, the insurance benefit will not be paid. The insurance company will refund the premiums paid only.
- Non-disclosure. A person applying for insurance is required to provide accurate and relevant information that’s requested on the application and/or as part of the application process. For example, withholding that you saw a particular medical specialist.
- Incontensability. After a policy has been in place for 2 years, the “incontestability period” is completed. The insurance company will not dispute statements made in the life insurance application, unless they believe them to be made on-purpose or fraudulently.
The bottom line is that insurance contracts taken out in good faith do pay out. Importantly, choosing a local broker that you trust is helpful. They can support your beneficiary during the claim process, while being empathetic during the difficult time.