PolicyMe content follows strict guidelines for editorial accuracy and integrity. Learn more about our editorial guidelines.
You may have heard the term “set it and forget it” when talking about whole life insurance. With a tax-free death benefit and guaranteed cash value growth, a whole life policy can seem like the best coverage option at first glance.
There’s a lot to know about whole life insurance. But for starters, here are five key things you should know about whole life insurance:
Whole life insurance is a type of permanent life insurance, meaning that it provides coverage over your entire life. Permanent insurance is one of the two main types of life insurance, with the other being term life insurance.
Short on time? Insurance advisors Erik Heidebrecht and Tobin Tuff take you through the fundamentals of whole in this video:
Whole life insurance works by providing lifelong coverage (i.e. a guaranteed death benefit) as long as premiums are paid.
Whole life insurance is for those with permanent dependents that rely on their income or for wealthy Canadians looking for tax-sheltering benefits.
Whole has a number of advantages, but the coverage isn’t fit for everyone. Whole life insurance could be a good option if:
But because whole life insurance is pricier than term, it may not be the best for those on a tight budget or who only need coverage for a specific period (like while you pay off the mortgage or have young kids to take care of).
Most Canadians would probably benefit more from a simple and affordable term policy. Get a no-commitment quote to see just how much you can save in just a few clicks. No commitment required.
One of the biggest selling points of whole life insurance is that it has an investment component through the cash value.
But how does whole life actually stack up against other types of investments? If you strip away all the talk promising significant returns, the reality is different.
With the exception of specific circumstances, whole life may not be the best option for the average Canadian looking to invest. Here are some reasons why:
But there are specific circumstances where whole life is worth it:
Does whole sound like the right option for you? Click the link below for a comprehensive review of the best whole life companies in Canada, complete with pros and cons, quotes and more.
The average whole life insurance policy has a rate of return ranging from 1 to 3.5 per cent, as reported by the Insurance Pro blog. At the end of the day, rates of returns can be more conservative.
Here’s how it compares to the average rate of return for other investment types:
The earnings themselves are generated by the interest on the policy’s cash value, and are issued as an annual dividend payment (which can be withdrawn or reinvested).
The amount of interest is dependent on the life insurance company’s profits. And it grows on a tax-deferred basis, meaning you only have to pay income taxes on the interest when you withdraw from the CSV.
Most life insurance providers do offer a guaranteed minimum rate of return, which ensures that your policy’s cash value will earn interest regardless of the insurer’s investment performance.
You can access the cash value of your whole life insurance policy. If you withdraw from your whole life insurance funds, you’ll have to pay taxes.
And even then, while it can sound tempting, you’ll likely never access near the amount you’ve paid into it.
Here’s a good rule of thumb for assessing the cash value of a policy:
If you cancel or surrender your policy: you’ll be entitled to get the policy’s cash surrender value but your beneficiaries will not receive the death benefit when you pass away.
If you pass away: if your whole life coverage is active when you pass away, the insurer pays a guaranteed death benefit to your beneficiaries. The policy’s cash value (or what remains of it) goes to the life insurance company.
The cash surrender value can be a good investment, but the limitations of whole life insurance policies create some challenges.
There are four main reasons why the cash surrender value isn’t the straightforward investment some might think:
Using your money to invest in other avenues is probably a better idea than spending on a permanent life insurance policy.
Permanent life insurance policies provide a guaranteed rate of return, but the high cost of paying into a policy over the course of your life makes it less rewarding than other types of investment.
If investing is a priority, it can be more worth it (and cost-effective) to purchase a term life insurance policy that covers your mortgage and the financial needs of any dependents.
The money saved on term life insurance premiums can then be invested elsewhere for potentially higher returns.
Here’s how the investment potential of permanent life insurance compares with the combination of going with a term policy and investing the rest:
Most people need life insurance to provide their families with financial security should they pass away. Ideally, your coverage needs decrease once your mortgage is paid and children are financially independent.
So why continue to pay high premiums for coverage you don’t need? Instead, you can make contributions to other investment accounts, which have a greater degree of freedom and are unaffected by changes to your insurance needs.
There are three other main types of life insurance policies available for Canadians, including:
All types of life insurance have the tax-free death benefit in common, but each has unique features.
Whole policies have fixed premiums and a cash value component; universal is known for its flexibility; and term has some of the lowest premiums in the industry.
Let’s compare policy specs by type, along with who is best for each.
Whole life insurance is best for:
Universal life insurance is best for:
Term life insurance is best for:
Need some extra pointers on what type of life insurance you need? Our non-commissioned advisors are available to give you honest, genuine advice. They'll even tell you if you don't currently need life insurance!
Whole life insurance can be a useful tool when it comes to estate planning. The death benefit can be used to pass wealth onto your beneficiaries with tax advantages.
But again, for the average Canadian, the high cost of keeping a whole policy active doesn’t justify the estate planning and tax deferral benefits.
Introducing Paula, a 42-year-old non-smoking woman living in Ontario.
So what should Paula do? With whole life she can’t guarantee that she’ll always be able to afford the premiums, especially with two kids to look after. It could become a financial burden and put her coverage at risk (and the family's financial safety net, too.).
Paula can save upwards of $170 per month by opting for a term life insurance policy with the same death benefit.
Of course, everyone’s insurance needs are different. You need to weigh out your own specific financial situation when choosing policy. Use our life insurance calculator to get an accurate estimate of the amount of coverage your family needs!
Whether whole life insurance is worth it or not depends on your individual situation and financial goals. Whole life insurance offers coverage that lasts your lifetime and it builds a cash value over time that can be used through loans or withdrawals.
But whole life policies tend to be more expensive than term life insurance due to the cash value component and lifelong coverage. And the returns on the cash value are often less than what you could earn from other types of investments.
Some Canadians may get value from whole life insurance, like those who want guaranteed lifelong coverage, have maxed out their retirement accounts, or have a high net worth. But for many people, particularly if you're young, healthy, and on a budget, other types of life insurance or investment vehicles might be a better fit.
Whole life insurance isn’t a scam, but it is often mis-sold. It’s sold in circumstances where it won't perform its best, which doesn’t help the people who really need appropriate insurance coverage.
In Canada, it’s illegal to recommend a life insurance policy as an investment, so you should never see an advisor selling it as an investment vehicle. It exists only as a contract that money will be paid to beneficiaries upon the policyholder’s death.
The fact remains that you can use permanent life insurance policies as an investment vehicle, but they shouldn’t be advertised to people this way.
Some advisors may offer them as an option to high tax bracket individuals who are looking to supplement their retirement income, but it’s unlikely that this will pay off in the long run.
There simply are too many ways that people don’t end up benefiting from the features that might be used to sell whole life insurance policies.
While whole life insurance is not a scam, the biggest concern is that the chance of the policy paying for itself is very low unless written in that it’s guaranteed. You might find a policy that states in writing it will be paid up in 20 years.
However, if you’re pre-paying, you’re simply never gaining from the benefits that make whole life insurance sound attractive.
It could happen and advisors often mention it as a possibility, but it’s rare! They might outline a scenario where you pay $100/month for your policy and pay for 10 years or pay $250/month for 20 years. You’ll be paying more for the privilege of not paying at some point.
This isn’t a popular choice because of the higher cost. For most people who want insurance, it’s much easier to manage a policy with premiums of $30 or $60 per month instead of what eventually becomes $200 or $300 per month.
If you hold a whole life insurance policy with a cash value, you may be offered a feature that allows you to suspend or pause your premium payments if you’ve contributed more than the minimum in the past.
This pause in payments is often called a “premium holiday” and can sound attractive. However, because so few people ever pay more than the minimum, you’re unlikely to ever benefit from this feature.
ECONOMICS. (n.d.). Canada Stock Market Index (TSX) - 2023 Data - 1979-2022 Historical - 2024 Forecast. https://tradingeconomics.com/canada/stock-market
Hodges, D. (2015, February 26). Surprising truths about your RRSP. MoneySense. https://www.moneysense.ca/save/retirement
/surprising-truths-about-your-rrsp/Roberts, B. (2021, August 15).
Rothery, N. (2018, July 31). Why your returns are a lie. MoneySense. https://www.moneysense.ca/save/investing
What can you Expect your Whole Life Insurance Rate of Return to be? The Insurance Pro Blog. https://theinsuranceproblog.com/what-can-you-expect-your-whole-life-insurance-rate-of-return-to-
Recommended reading: Best life insurance Canada