Whole life insurance is a type of permanent life insurance that is available to Canadians. Whole life insurance plans provide policy owners with insurance protection where the premium isn’t subject to change at renewal points in the future. You pay a level premium for the duration of the policy. When it is established and the premiums are calculated, whole life insurance also has a forced savings component attached to it. Cash value life insurance can be used at a multitude of points throughout your life, and we will look at how it can benefit you at a few of these different stages.
In This Article:
- Defining ‘Whole Life Insurance’
- How to Access the Cash in a Whole Life Insurance Policy
- Whole life coverage provides protection for your family
- Whole life insurance and retirement
- Do you own a small business?
Defining ‘Whole Life Insurance’
Let’s begin by outlining what we are talking about. Whole life insurance refers specifically to the type of coverage that has a level premium and includes a cash value component. For the purpose of this discussion, we aren’t talking about universal life policies. Although universal life plans do have a level premium, they do not have the cash value component that makes whole life coverage unique. As a subset of the whole life insurance policies, we will talk about Participating Whole Life Insurance (PAR). PAR insurance includes the cash values that are familiar from whole life plans, but they are also eligible to receive dividends from the insurer each year; these dividends are often used to purchase more whole life coverage in the form of Paid-Up Additions and will allow for growth in the cash values and death benefit for the policy. Whole life coverage does not include term insurance. Term policies come with built-in renewal points where the premium increases, and they also have an expiry date attached to them that makes it so that the coverage doesn’t necessarily extend for your whole life.
How to Access the Cash in a Whole Life Insurance Policy
There are three basic ways that you can access the cash in a whole life insurance policy:
- Full Surrender – This means that you surrender the policy back to the insurer, and they pay you the amount of cash value that has accumulated within the plan. You no longer have the death benefit coverage after a policy surrender.
- Cash loan – You can borrow the money out of the policy (within the insurers’ guidelines) and maintain the death benefit coverage. You can repay the loan in a lump sum or via monthly installments if you wish. There will be interest charges that accumulate within the policy on the outstanding loan balance, and if you happen to die while a loan is outstanding, your beneficiary receives the death benefit from the plan less the amount of money that remains owing.
- Partial Surrender – If you have a PAR policy with paid-up additions in it, you are able to surrender the additions only; this can generate you cash right now while leaving the base policy alone so it continues to grow as years pass.
Whole life coverage provides protection for your family
When you are raising a family, you can divide that era of your life into a variety of smaller periods based on the age of your children. Each of these time periods will have unique circumstances that will provide you with different opportunities and advantages associated with owning a whole life insurance policy. Any parent can tell you that the needs of a child who is under 5 are vastly different from the needs of a child who is in post-secondary education. Whole life insurance policies can provide you with valuable insurance coverage throughout the times that your family is growing. PAR policies add to the level of protection as the death benefit grows, making it more likely that the payment to your beneficiaries will keep pace with inflation from when the policy was issued. When your family is young, there is incredible value in the death benefit portion of a life insurance policy. The effect of an unexpected death on the financial future of your family can be devastating, and having a life insurance policy in place can help offset these effects. As your family matures, the cash value portion of the policy will grow as well. This means that there is cash that becomes accessible to you over time. You may want to look at the potential of borrowing from the policy to help fund post-secondary education for your children as an example. Owning a whole life insurance policy with cash values in it becomes one more financial planning tool available to you when you are looking at options for supporting your family.
Whole life insurance and retirement
If you own a whole life insurance policy and have reached the point in your life where you are considering (or have) retired, there are many reasons that this type of life insurance is valuable to you. Again, and this is a common refrain, the death benefit will remain valuable to the beneficiary of your policy. Consider a situation where there are two spouses, and one passes away. Both contribute income to the household in retirement from a variety of sources. One of these income streams will be government-sponsored retirement benefits, your Canada Pension Plan (CPP) and your Old Age Security (OAS). When you die, a portion of the CPP that you earned can still be collected by your spouse, but this amount may be reduced. The reason for the potential reduction is that there is a maximum amount of CPP that can be paid to one person, so if you and your spouse’s CPP combined exceeds that amount, you will see a reduction. The OAS has no survivor benefit, so when someone passes away, that income to the household is lost. In 2023 the OAS amount is $691.00 a month for someone who begins to collect at age 65. That is equal to $8,292 in annual income that stops just from OAS if you pass away. Your beneficiary can offset some of the lost income from pensions with the death benefit from a whole life insurance plan.
Another option to consider in retirement is that the cash value in your whole life insurance is another asset that can be used to fund your income needs. As an example, the cash value in life insurance can be used to secure a line of credit that can then be used to provide funds for your daily living expenses (or a trip to Fiji if you’d like). These lines of credit are available from several lenders and are set up in a way that a credit limit of up to a pre-set amount (80%-90% typically) of the cash value can be made available. If you pass away, the policy death benefit pays off the line of credit first, and any unused amount is then paid to your beneficiary. The benefit is that while alive, there is more liquidity built into your day-to-day living.
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Do you own a small business?
Hopefully, by this point in the article, you are beginning to sense the theme. Whole life insurance policies provide their owners with two valuable benefits. The first is the death benefit itself. If you own a small business and passed away, the death benefit can be used to offset any taxes that the deemed sale of your business triggered, or it could be used to keep the business going while a suitable replacement is found. The second benefit comes down to liquidity, these policies provide you access to cash when you need it. I have often spoken to clients about borrowing money from a bank. It wasn’t uncommon from my personal experience to see that when I didn’t need money, I would get letters in the mail all the time about how I was pre-approved for lines of credit. But what happened if I needed money? Say I had the opportunity to expand my business via an acquisition that required me to borrow money. If you ask for the money, those letters that talk about being ‘preapproved’ might as well have never been written. If I needed the money, it seemed like there was a forensic-level amount of accounting documentation requested, regardless of the fact that I had a letter showing how they had offered me more money than I was asking for three weeks ago. Being able to borrow against the cash value of a whole life insurance policy doesn’t require an in-depth application process, after which you can be turned down. If it is within the policy limits, you will be approved. This provides your business with liquidity at times when it is needed most, no questions asked.
Whole life insurance policies can be an incredibly valuable asset as part of your overall financial security plans. They provide you with peace of mind that if something unexpected happens to you that there will be money available to your beneficiaries so that they are forced to deal with financial burdens on top of the grieving process. Here’s the kicker, whole life policies can also provide you with access to cash today, when you need it, without you needing to die. Security for your survivors and help in making your financial plan achievable are two fantastic reasons to own a whole life insurance policy. If you would like more information on whole life insurance book a call with one of our life insurance specialists today.