What is Whole Life Insurance?
Whole life is a type of permanent life insurance, meaning it lasts for the duration of your life, as long as you continue paying your premiums on time.
The premiums in whole life insurance stay level for the entire duration of the policy. This means that they start at a higher rate than term life policies, but will eventually be lower at later stages of life, as term premiums increase each time you renew your policy.
There are some whole life policies that will allow you to pay premiums, sometimes increased, for a set period of years or to a certain age, with no more premiums required after that.
Fixed investment portion
Whole life insurance, along with universal life insurance, has an investment component, separate from your insurance component. This is called a participating policy, meaning you may participate in the profits of the insurance company through investment.
In whole life, the insurer decides how the investment component is invested, but it is typically a steady rate of return with low volatility. The investments are in a tax shelter, meaning all investment income earned in a whole life insurance policy is tax-free when left to a beneficiary. (The investment income is taxed if borrowed from the policy.)
Also, permanent policies feature a cash value, also called a “cash surrender value” or CSV, which grows the longer you’ve had the policy. This amount exists if you want to borrow against your policy or cancel it to redeem the CSV, also called “surrendering.” This amount, once withdrawn, is not shielded from tax, so surrendering your policy to collect that amount can lead to a substantial chunk taken away from your insurance payout that you’d have worked for a long time to earn. There may also be other consequences, like having to repay the borrowed amount back into your policy within a set time, so be sure to understand your policy.
Most policies will not have this option available from day one, but rather after five or ten years of paying into the policy. Many insurers also charge high surrender fees that gradually decrease over time.
What’s the difference between whole and universal life insurance?
There are three main differences between whole and universal life insurance policies:
- Premiums. Whole life insurance premiums stay the same for the entire duration of the policy, whereas universal premiums can be negotiated higher or lower, depending on the company and your policy.
- Death Benefit. Because the premiums of universal life can change, so can the amount of death benefit. This is reflective of the amount of cash value in the policy at the time of death and can be negotiated before death with the insurance company. The death benefit of whole life insurance grows with the investment portion, but can be predicted more easily.
- Investments. Although both whole and universal policies have an investment component, only in universal can you decide what the investments consist of. In whole life insurance, the company decides upon the investments.
Why should I buy whole life insurance over another policy?
Whole life insurance is a “get it and forget about it” policy—your premiums stay the same and no change is needed at any time. This is best for people who want simplicity, have some money to play with in the beginning, and know they want life insurance for the rest of their lives.
- Did you know?
- 73% of Canadians say they can’t afford life insurance.1
- Consider this…
- $84/month for coffee2 vs. $24.08/month for $250,000 life insurance.3
- Life Insurance is affordable!
References and Notes
- LIMRA: Canadian Life Insurance Ownership Study, 2013.
- Initial monthly cost for a healthy, 40 year old female, non-smoker purchasing $250,000 of Empire Life Solution 20 life insurance as of December 7, 2016. Price increase every 20 years.