Permanent Life Insurance
Understanding Whole Life Insurance
Permanent life insurance, also known as “whole life” insurance, provides your beneficiaries with a tax-free payment. Some plans can build cash value over time. Whole Life insurance costs are usually guaranteed to remain the same throughout the life of your policy. But because the premiums do not increase throughout your life, they are, of course, higher than those of term life plans.
This type of insurance provides coverage for the entire length of the policy holder’s life and pays a guaranteed tax-free benefit to the beneficiaries.
The cost (referred to as the “premium”) is based on coverage amount selected, age, medical history, smoking status, current health and any possible risks in terms of lifestyle.
A distinguishing factor of Whole Life Insurance is the ability to accumulate cash value over time.
Cash value, or cash-surrender value is the dollar amount that has accumulated over the life of the policy. This cash value grows on a tax-deferred basis, which means that income and growth generated within the policy is not taxed. The policy holder can borrow cash value from the policy as a loan. However, if this loan is not repaid, it reduces the amount of death benefit to beneficiaries by the outstanding amount plus interest.
A whole life insurance policy, once issued, can generally not be revoked, reduced, or cancelled by the insurance company. You are in the driver’s seat! Whole life insurance remains in force for the life of the insured as long as the premiums are paid.
There are usually several options if you ever want to cancel:
- You can use the accumulated cash value to continue paying the premiums until the cash surrender value is exhausted.
- You can surrender the policy and receive the accumulated cash value.
- You could elect a reduced amount of “paid up for life” insurance.
Who should consider Whole Life Insurance?
Honestly, most people should not consider whole life insurance and should instead cover their financial obligations and their income using a well-designed program of Term Life insurance.
If you have maximized your RRSPs, TFSAs and have paid off all your debts including your mortgage, there may be a need for whole life insurance if:
- You want to leave a permanent legacy for your heirs.
- You need protection for the rest of your life.
Compared to term insurance, which may start cheaper, with a whole life insurance policy, you pay a level premium. This means that the rate you pay will never increase as your premium are determined by your age and health when the policy is issued. This differs from term life insurance which becomes very expensive to maintain as the premiums increase with age.
What Whole Life Insurance can do for you
- Pay the taxes owing to Canada Revenue Agency (CRA), especially from capital gains tax on the appreciation of illiquid assets like rental real estate, vacation properties and business interests.
- Provide tax-free cash to your estate in order to prevent selling assets at fire sale prices in order to pay obligations.
- Provide tax-free cash to equalize the estate when leaving assets to multiple beneficiaries.
- Provide an endowment to a special charity.
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