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Whole life insurance is used when your need for insurance is expected to last your whole life. It can be used as an estate preservation tool, or investment plan, as well as a risk management tool.

Premiums are guaranteed and can be paid over a short span, or over your whole life.

Because of the increased premiums, when compared to term life insurance, permanent life insurance is often misunderstood and criticized. Understanding its strengths, weaknesses, and where it is best used will help you make an informed decision.  

One good way to use whole life insurance as an investment tool is to purchase a fast pay, participating, whole life policy, with a paid-up additions rider.

Let's translate all those words into English.

Fast Pay indicates the time it takes for policy premiums to be fully paid. 20 year pay periods are common. The reason the short pay period is beneficial is because if you pay up ahead of time, the insurance company will invest your money, and you will benefit from the growth, so the longer they have your money, the more it grows.

A Participating policy is a type of policy usually offered by a mutual insurance company. Owning a participating policy makes you a member of the mutual. Not unlike a credit union's customers become members. As a member, you are entitled to participate in the profitability of the insurance company. Policies will pay out this profit in dividends. You will be given several options for how your dividend will be paid out. The most common method is in the form of paid-up additions.

Paid up Additions, as already stated is one way an insurance company will pay out dividends to its members. Simply, the insurer is taking your dividend money, and paying for additional coverage, which increases your death benefit, and your cash surrender value. Depending on your age and health, it's not uncommon to see returns close to 5% growth on all premiums paid into the policy.

Don't misunderstand what cash surrender value means. People commonly drop the keyword, "surrender" and call it cash value life insurance, which is a huge mistake. Cash Surrender Value is in a sense, the insurance company, saying;

"We'd be happy to pay you $xxxx, in exchange for you surrendering your rights to your death benefit."

A common misconception is that the lifeco is pocketing your money when you die. It isn't your money, it's an offer for you to surrender the rights of your policy. The CSV is usually a portion of the death benefit. If your death benefit is $250,000, the company might offer you $150,000 to surrender your policy. Each company is different, but you will be given a complete illustration before you have to make any decisions.

Show Me the Money:

There are 3 ways to access the funds held inside a whole life insurance policy. When you die, you receive the death benefit in a lump sum, tax-free. If you find that your retirement funds weren't enough to fund your whole life, you can choose to surrender the policy or collateralize it in order to borrow against it. 

Option 1 is out of your control but is the primary purpose of a permanent life insurance plan. Upon death, everything you own is sold (deemed disposition), and the profit on the sale is taxed. There are several exclusions from this tax, including a TFSA, cash, your principal residence, and life insurance. Growth inside a life insurance plan can be passed to the next generation, a friend, a charity, or wherever you would like it to be passed, tax-free.  

Option 2 and 3 are very similar, while you're living you can surrender your policy, and access the CSV, or you can borrow against the policy. Which is best for you depends on your tax rate compared to interest rates at the time you make the decision. If you are still earning a high taxable income from pensions and registered income funds, and interest rates are reasonable, collateralizing your policy might be the better option. In contrast, if you don't have much taxable income, or interest rates are high, surrendering your policy might be the best option. You will be choosing between paying tax or interest. 

Universal Life Insurance:

Universal Life Insurance offers the ability to invest your money inside of an insurance policy. It has strengths and weaknesses, like all policies. Its main strength is the ability for your policy to grow as the investments grow. Its main area of concern is that the investments involve risk. I generally prefer participating whole life, or term, and invest outside of insurance. There is a place for this product, but it's generally fairly narrow.

Careful planning should be done when choosing a product that suits your needs. Moving in and out of policies will end up costing you. Research all of your options, and don't make a quick decision, other than term, if you have anybody that depends on you to provide for them, you should make a quick decision to take out a term policy.


The "Whole Life Policy" Chart represents a $100,000 policy on a healthy, 24 year old male.

This policy is fairly typical of a participating whole life policy available today.

The policy is set to be fully paid up after 20 years. The cash surrender value and death benefit of this policy grow over time. 

After holding the policy for 70 years, he will have put

$40,000 Total Premiums Paid
$500,000 Cash Surrender Value 
$550,000 Death Benefit