A whole life insurance policy provides a cash payout to your loved ones in the event that you die. While no one likes to contemplate their own demise, it’s important to consider the financial needs of your survivors. There are many options for life insurance in Canada and whole life is one of them.
What is whole life insurance?
As the name suggests, whole life covers you for your entire life. One of the key features is that the premium is fixed and never changes.
Whole life insurance can provide funds for your family to:
Pay for your funeral
Cover their day-to-day living costs
Pay off a mortgage
Save for your children’s post-secondary education
When you need life insurance
Not everyone requires life insurance. If you are single and don’t have any dependents, you may not need it provided you have enough savings to pay for your funeral costs. If you don’t have cash saved up, you can purchase a small policy to cover these expenses.
People who have a spouse and children should have life insurance. As indicated above, there will be a number of costs that still must be covered in the event of your death. You don’t want your family to be panicking about money as they grieve.
What are the different life insurance options?
In addition to whole life insurance, the industry has developed a wide range of life insurance offerings to suit various needs. These include:
Term life insurance
This insurance provides coverage for a fixed time, usually 10 or 20 years. At the end of the term, you have the choice of discontinuing the insurance or renewing it. Premiums usually go up on renewal since the risk of death is higher as you get older.
Universal life insurance
This is similar to whole life insurance. It offers permanent life insurance combined with an investment account. Withdrawals and loans may be permitted.
Mortgage life insurance
This insurance pays off your mortgage in the event of your death. The main limitation is that it does not provide your survivors with any cash to cover other expenses, such as for daily living.
Pros and Cons of Whole Life Insurance
Whole life insurance generates some cash value. If you decide you no longer need it, you can cash out.
The premiums are fixed. You never have to worry about your payments going up.
Whole life is usually more expensive than term life insurance
It won’t generate much cash value in the first few years
Whole Life Insurance vs Term Insurance
When purchasing insurance, you will need to decide whether you want a whole life insurance policy or term insurance. As indicated, whole life premiums are fixed and the cost never changes. With term insurance, the premiums are set for the duration of the term, which is usually 10 or 20 years.
Initially, whole life insurance may be more expensive than term insurance. However, term usually becomes more costly as you age since the risk of dying is higher. Therefore, your premiums may go up when you renew.
Is there cash value of life insurance? Yes, whole life insurance generates some cash value, although this amount may be quite small during the first few years. Term insurance has no cash value so if you decide to cancel the policy you will end up with nothing.
Should you purchase both whole life and term insurance? For some people, this can be a good option. A small whole life insurance policy can ensure that basic costs, such as a funeral, are covered. Term life insurance may be purchased when you have dependents (such as young children) and then cancelled later when the kids are grown and you no longer need the coverage.
How much does whole life insurance cost?
The policy price will vary depending on your age, health issues and the amount of coverage. For example, a 30-year-old woman who is seeking $500,000 in coverage would pay about $212 monthly for whole life insurance. Since women tend to live longer than men, their premiums are usually lower.
The cost of term insurance is dramatically less. For $500,000 coverage over a 20-year term, the same woman would pay $35 per month. For a 10-year term, it would cost just $23 per month.
Why the huge difference? Because term insurance is likely to expire before you die – most people will get nothing. With whole life insurance, you are guaranteed to receive the death benefit as long as you keep paying the premiums. And the premiums stay the same, no matter how long you have the insurance.
Whole life insurance as an investment
For most people, whole life insurance is not the ideal investment. It’s much better to max out your RRSP and TFSA savings to the limit allowed under these plans.
If you have already made the maximum contributions to registered plans, whole life insurance may be a good investment. A key advantage is that the death benefit payout for all life insurance is received tax free by your beneficiaries. If you want to leave an estate to your heirs, whole life insurance may be a solid investment.
Can I borrow against my life insurance?
Yes, if you have whole life insurance with a cash value, you can use it as collateral. This may allow you to get a lower rate than borrowing without security.
How do I buy life insurance?
The first step is to determine how much life insurance you need and can afford. Most life insurance companies offer online calculators to estimate this.
As we’ve discussed, there are many options for life insurance, including a whole life insurance policy and term life insurance. You can contact an insurance broker to help you to determine which kinds of insurance are best for you and your family. The broker will contact several insurance companies to get the best premium for you.
Of course, you can also do this on your own by asking several companies for the cost of the policy. Just be sure that you are getting prices on comparable coverage.
Are you incorporated in Canada?
Small business owners and incorporated individuals in Canada can use a Health Spending Account (HSA) to save on their medical expenses. An HSA is a cost effective alternative to traditional health insurance. The plan covers a wide variety of health and dental expenses. You could save thousands of dollars in taxes with an HSA.
Find out more about Health Spending Account (HSA), download my free guides: