If you’re the kind of person who likes to cut your cake and eat it too, whole life insurance could be your perfect financial solution. It combines the peace of mind of life insurance with investments that let you pocket some extra cash while you’re still around.

Think of this article as your easy guide to understanding what is whole life policy, how it works, and how you can best use it to your advantage. Let’s take a look.

Also check out our quick video on Whole Life Insurance Explained below!

What is whole life insurance?

Whole life insurance is a type of permanent insurance that covers you for your entire life and allows you to access a part of the death benefit as cash value during your life. Some policies also pay dividends, further helping you to grow your wealth over time.

It’s the perfect coverage for long-term needs such as estate planning or leaving an inheritance for your loved ones.

Term life insurance is right up your alley if you’re just getting started with #adulting — like getting your finances in order, learning how taxes work, and thinking about whether you should start investing.

Life insurance is a great way to build a better financial future for your family. And term life insurance is the most affordable and easy option for this kind of security.

This article is your handy guide to the basics of life insurance. We explain what it is and how it works. And, we answer your biggest questions, like how much does term life insurance really cost, what happens when the term ends, whether you can get your money back, and more.

Knowing the ins and outs of different life insurance policies is essential to choosing the right type of coverage for your needs. In this article, we compare whole life insurance and universal life insurance: two common types of permanent insurance that give you coverage for life but also differ in important ways.

What is permanent life insurance?

Permanent life insurance lasts for your entire life. Unlike a term life insurance policy, which only covers a specific period of time, permanent plans cover the policyholder until they pass away.

Read more about the difference between term life insurance vs. permanent life insurance.

As with all life insurance, permanent policies pay out a death benefit to your beneficiary. They’re best used for long-term needs, like taking care of estate taxes, caring for dependents, and paying for end-of-life expenses like funeral costs.

Additionally, unlike term insurance, most permanent life insurance policies have an investment component that accumulates a cash value. This is one of the most attractive features of permanent policies, in addition to the all-important death benefit options. Many Canadians use this investment component to supplement their retirement income.

Permanent life insurance usually comes with two investment options:

• Participating policies: These generate dividends that are paid out to you every year.
• Non-participating policies: There are no dividend payments but the cost of insurance is lower.

Read more about participating life insurance. 

What is whole life insurance?

Whole life insurance (WL) is a type of permanent life insurance coverage that accumulates a cash value. As with all permanent life insurance plans, it provides lifelong coverage. As long as premium payments are made for the duration of the policy, beneficiaries are guaranteed to receive a tax-free death benefit when the insured dies.

With whole life policies, the cost of insurance is decided at the start of your contract and remains fixed for the policy’s duration. This means you are guaranteed to pay the same premium rate for the rest of your life, unlike with renewable term plans.

Read our review of the best whole life insurance companies in Canada. 

How whole life insurance works

When you apply for a whole life policy, premium rates are decided based on the amount of coverage and other factors like your age, health, and lifestyle. In some cases, you may be asked to take a medical exam.

Once your policy is approved, you are responsible for paying premiums either annually or monthly, depending on your agreement with the life insurance provider.

Every time you pay premiums, a portion of the money goes towards keeping the policy active and covering administration fees, while another portion is invested by your life insurance provider. This money is your policy’s cash value. It increases with a fixed interest rate and on a tax-deferred basis.

You also have access to cash value during your lifetime. Or, if you cancel the policy, you can walk away with a cash surrender value of whatever has accumulated minus applicable surrender charges. This can be accessed whether you have participating or non-participating whole life insurance.

When a whole life policyholder passes away, their beneficiary is guaranteed a death benefit. This is paid by the life insurance company as a one-time, tax-free payment. This money can be used as income replacement for family members, to cover final expenses, as an inheritance, or anything else the beneficiary chooses to use it for.

What is universal life insurance?

Universal life insurance (UL) is also a type of permanent life policy that provides lifelong coverage and a tax-free death benefit when the policyholder dies.

But what stands out the most about this type of insurance is its flexible premiums, death benefits, and investment options. This is perhaps the biggest difference between universal and both whole and term policies.

With a universal policy, you choose how much they want to pay in premiums. Of course, there is a minimum payment amount, which covers the cost of insuring the policyholder as well as administration fees. But policyholders can decide how much more they want to contribute to their policy’s cash value portion. The minimum premium cost can also vary over the course of the policy, depending on whether the size of the death benefit changes.

In addition to flexible premiums, this type of policy can give you a greater say in how your cash value is invested. You can choose between three different investment options, which vary in terms of interest rate and risk:

• Daily Interest Account (DIA)

Interest is calculated and credited every day. The interest rate is set by the insurer and may fluctuate.

• Guaranteed Interest Account (GIA)

Guaranteed interest rates for a specific period of time, such as 1, 5, or 10 years.

• Variable Interest Options (VIO)

Interest depends on index performance, mutual funds, or other managed portfolios. Potentially bigger returns but also higher risk.

How universal life insurance works

Applying for a universal life insurance policy looks similar to other permanent life insurance policies: your minimum premium rate is decided by the life insurance provider based on amounts of coverage, as well as age, health, and lifestyle.

To keep the policy active, you must ensure that your policy’s premiums are paid as agreed with your insurer. When you pass away, your beneficiaries will be entitled to a one-time, tax-free death benefit.

But unlike with whole life insurance, you can decide how much money you want to pay into a UL policy’s cash value. Because of this, people may often consider universal life when they’re looking for an investment strategy.

For instance, they may treat their universal life policy as an investment account where they deposit money to be invested. The cost of the life insurance policy is deducted by the insurer, and the remaining balance can then be invested and generate tax-deferred interest.

Is universal life insurance risky?

Universal life coverage is considered risky compared to whole life insurance. Whereas whole life insurance offers many guarantees (fixed premiums, death benefit, policy dividend options), universal life insurance offers flexibility and a wider range of investment options. Naturally, this comes with greater risk.

That being said, the level of risk associated with a universal life insurance plan depends on the type of investments chosen. Universal life policyholders should always keep in mind that their cash value depends on their rate of return.

The greatest risk is if you rely on your policy’s cash value to pay your premiums. If your investments underperform and you do not have enough money in your cash value account to cover premiums, your policy can lapse. This could leave you without the crucial death benefit options that life insurance is meant to provide in the first place. It is therefore important to keep a close eye on the investment portion of your universal plan.

Whether this form of life insurance is the right choice for you depends on your appetite for risk. Even if you’re just thinking over permanent life insurance options, you should speak with a licensed life insurance expert like the ones at PolicyAdvisor.com before you make your choice.

What do whole life and universal life have in common?

Whole life insurance and universal life insurance share some important key features. Namely, they both:

• Provide lifelong life insurance coverage as long as premiums are paid
• Come with an investment component and cash value component, which can be used as collateral for policy loans
• Pay a tax-free death benefit, just as term plans do

What is the difference between whole life and universal life insurance?

These two types of life insurance also have key differences that set them apart. Let’s take a look:

Is universal life insurance cheaper than whole life insurance?

Universal life insurance can be much cheaper than whole life insurance, for a few different reasons.

With whole life insurance, you pay higher premium rates over the course of the policy to ensure a guaranteed premium rate, death benefit, and cash value.

With a universal life insurance product, on the other hand, you can choose to decrease your policy’s death benefit and premium payments based on your needs. Universal life insurance is also less expensive because the policyholder takes on more risk by generating cash value through investments rather than a fixed interest rate.

How much does whole life insurance vs. universal life insurance cost? 

Life insurance premiums can depend on factors like age, sex, health, and lifestyle.

But, to give you an idea, a non-smoking male in his mid-30s can expect to pay roughly $160 per month for a whole life insurance policy worth $250,000.

The same man can expect to pay about $120 per month for universal life insurance. But, remember, the cost of universal life insurance varies: you can choose to pay more to increase your universal life cash value.

Read more about how much life insurance costs in Canada. 

Which gives a greater cash value?

It really depends. Universal policies may have a greater potential for growth, but also greater risk. On the other hand, cash accumulation is more steady in whole life policies over time.

Whole life insurance has guaranteed and more or less predictable cash value growth. Every time you pay your monthly or annual premiums, a portion is added to your cash value, which grows based on a fixed interest rate. So, your growth is guaranteed.

Universal life cash value accumulation depends on factors like your premium payments. Remember, you decide how much you want to put into your investment account. Universal life insurance growth also depends on investment performance, which can vary depending on market conditions and current interest rates.

In a strong market, universal life insurance can have much higher returns than whole life insurance policies. In a weak market, however, returns are not guaranteed. This is why it’s important not to get dazzled by the potential growth alone.

Instead, you should have a chat with one of our insurance advisors to help determine which life insurance option is best for you.

Which builds cash value quicker?

Universal life insurance has the potential to grow cash value more quickly if you invest in your policy early on and investments perform well.

With whole life insurance, the portion of premiums that goes towards cash value decreases over time — as the cost to insure you goes up. This means that the cash value grows at a more rapid rate in the early years of the policy, but then begins to slow.

Is universal life insurance better than whole life insurance?

When it comes down to it, no type of policy is “better” than another. The best policy is determined based on your needs.

If a stable and easy-to-manage policy is what you want, then whole life insurance will be better than universal life. Of the two, it’s the lowest-risk option for policyholders.

If you want flexibility and a greater say in how your money is invested, then universal life insurance will be the best choice.

Can you convert universal life to whole life or vice versa?

No, it is not possible to convert whole life insurance to universal life insurance or vice versa. So, choose wisely before you decide to buy!

We know that with permanent coverage, there are so many diverse options and combinations that it can be tricky to plan your best move. But that’s why the PolicyAdvisor experts are here to guide you and help if you’re looking for alternative options for an existing policy. Give us a call today or schedule one in the future so we can review the best options for you and your family’s financial security.

Let’s face it — no one likes thinking or talking about their own death. But, when it comes to having a financial safety net for your family, life insurance is something that should definitely cross your mind.

We all want to make sure that our families are financially secure at all times. This becomes even more important at a time when we’re not around to provide financial support. During such times, life insurance can give you peace of mind in knowing that your family will be well taken care of no matter what.

When you’re thinking about what kind of policy you should get to protect your family, you can choose between two main types of life insurance: term life or whole life. Understanding their differences can help you to know which one is the right choice for your family.

And we give you a cheat sheet to go by in this article. Read on to learn more.

What’s the difference between term versus whole life insurance?

The biggest difference between term life insurance and whole life insurance is how long the policy lasts. Term insurance covers you for a specific time period that you choose. Whole life gives you lifetime insurance coverage. But that main difference also leads to many smaller differences.

We take a closer look at the different features later on in this article. But first, let’s take a look at what term and whole life insurance are.

What is term life?

Term life insurance is life insurance that lasts for a specific period of time known as a Term. The term can be a fixed number of years or until you reach a certain age (e.g. age 65). You pay premiums to the life insurance company until the expiry of the term.

In return, your beneficiaries are entitled to receive a tax-free death benefit if you die within the term of the policy. Once the term ends, your coverage also expires, and you can stop paying premiums.

Term life policies are usually offered for periods ranging from 10, 20, or 30 years to specific ages such as age 65, after which the coverage expires. Some companies will also allow you to pick a term, in which case you can choose your own coverage period to meet your needs.

Put simply: term life insurance is easier to understand and has lower prices.

What is whole life?

Whole life insurance is a form of permanent life insurance that provides you with coverage from the day you get your policy until the day you die. In other words, it protects you for your entire life. As long as you pay your premiums, your policy never expires — it’s as simple as that.

This type of insurance gives your family financial protection and lets you invest at the same time. Most whole life policies come with something called a cash value component.

As you pay your premiums, part of that money is invested and generates a tax-deferred cash value that grows over time. You can then access it during your lifetime.

Some policies can also pay dividends. And, your death benefit can actually increase over time with the savings component offered by whole life.

There are different types of permanent life insurance, like universal. But whole life is the most common type. Since permanent insurance policies last your entire lifetime and keep the same value you put into it, they typically have higher premiums than term life.

What are some of the different features between term life vs whole life?

The biggest difference between term life insurance and whole life insurance is how long the policy lasts. Term insurance covers you for a specific time period that you choose. Whole life gives you lifetime insurance coverage.

But that main difference also leads to many smaller differences. Check out the chart below for a closer look.

What are the pros and cons of term life insurance?

Pros

• Simple to understand
• Inexpensive for the initial term
• Can be converted into permanent coverage
• Guaranteed level premiums for the initial term (price won’t change until the term ends)
• Flexible — you can tailor your term to fit specific short-term needs

Cons

• Coverage is temporary
• Death benefit is not guaranteed — you can outlive your policy
• Premiums increase if you renew your policy
• No cash value or savings component
• Cannot borrow or cash in on the policy

What are the pros and cons of whole life insurance?

Pros

• Permanent coverage — never expires
• Guaranteed level premiums for life (price won’t ever change)
• Savings component — generates cash value and annual dividends
• Can borrow or cash in on the policy

Cons

• Premiums can be expensive
• Investment returns may not be as large as with other investments

Is term life or whole life better?

There is no “better” insurance between term vs whole life. Instead, the best life insurance policy is the one that meets the needs of you and your family. This will be different for everyone because it depends on your unique circumstances.

In most cases, term life insurance is better when you’re younger because it’s cheap and can help to secure your immediate financial needs.

Whole life insurance is better for financial protection in the long run. It helps to make sure your family won’t have to struggle with money needs when you’re no longer around.

Below, we’ve given you some general reasons why term life or whole life might be right for you:

Which companies offer term life or whole life coverage?

Most of Canada’s biggest life insurance companies offer both term and whole life. This includes many of the ones we work with, like:

• Assumption Life
• Beneva
• BMO Insurance
• Canada Life
• Canada Protection Plan
• Empire Life
• Equitable Life
• Foresters Financial
• Industrial Alliance
• RBC Insurance
• Wawanesa
• And more

Check out our insurance reviews before you make a decision on a certain company. And be sure to compare the best quotes from each company right here on PolicyAdvisor.com.

Or schedule a call with one of our expert life insurance advisors who can help you determine which company would be best for you.

Protecting your loved ones in the event of your untimely death is serious business. That’s why insurance companies offer you so many options. But understanding those options can be a bit of a challenge. We sat down to explain one of the least understood types of life insurance out there – permanent insurance, and its various types including whole life insurance.

What is the definition of permanent life insurance?

Permanent life insurance represents a category of life insurance products that provide lifetime coverage. In other words, permanent insurance offers coverage until the policyholder passes away.

As the name suggests, permanent life insurance is best suited to protect ‘permanent’ or ‘lifelong’ needs such as estate tax liabilities, care for a disabled child or dependent, liquidity for closely-held businesses and even funeral expenses.

How does permanent life insurance work?

Most kinds of permanent life insurance policies tend to include a savings or investment component, in addition to the pure lifetime insurance coverage. Part of the premium is used to pay for investments, which accumulate within the policy on a tax-deferred basis and generate a cash value that can be accessed as needed by the policyholder.

The policyholder may use the cash value as savings available for retirement through partial or full withdrawals or by taking loans against the cash value by offering it as collateral to a lender. Due to the lifelong coverage and the embedded investment component, the premiums for permanent life insurance are much higher than other products.

Term life insurance is better suited as a strict protection product rather than an investment and planning tool.

What’s the difference between term insurance and permanent insurance?

The difference between a term life insurance policy and permanent life policies is pretty easy to understand. Permanent life insurance provides financial protection for an unspecified amount of time, from whenever you start the policy until the day you die. The policy will pay the death benefit to your beneficiaries at any time you pass away as long as you have been paying the policy premiums and have not cancelled the policy.

On the other hand, with term life insurance, you are covered and benefits are paid if you pass away within a specific period of time. The usual terms tend to come in increments of ten years, although some life insurance companies allow you to pick the specific years of coverage you want.

You see – with term life insurance coverage, you pay less as you get to choose the period of your life when you feel you need the most protection; it’s a bit more nimble than permanent insurance.

Also, term insurance does not have a savings or investment component in it, a feature that is associated with many kinds of permanent insurance policies, in particular with whole life policies.

The advantages & disadvantages of permanent life insurance

It can feel reassuring that permanent insurance is not limited to a specific period of time – or “term.” You keep paying and it keeps covering you in return until you die.

It also has an automatic savings component. If you weren’t savvy with investing your money (who are we to judge!), permanent policies can guarantee you some growth on your excess savings.

Permanent insurance products usually build up a cash value that grows tax-deferred. If you surrender the policy at any time, the cash value (or most of it) can be returned to you.

You can use the cash value to cover any premium shortfalls if you are not able to temporarily make premium payments.

With bigger gains, come higher costs. The major drawback of permanent insurance is that the premiums tend to be much higher than those of term insurance. It stands to reason: you’re exposing the insurer to more risk by asking them to insure you for an indefinite period of time including through your riskier years, from a health perspective. Once you start paying the high premiums of a permanent insurance policy, it doesn’t feel great to let it lapse.

The returns on whole life policies tend to be modest. It may take several years for a whole life policy to accumulate significant cash value than if you invested on your own.

Most policies have a surrender charge, which is essentially a fee you will have to pay if you decide to cancel the policy and withdraw the cash value. If you surrender, there will also be income tax consequences on some portion of the returned cash value. Did you hear that? It’s the sound of your accountant shopping for a new wallet as he dreams about your next invoice.

Is permanent life insurance a good investment option?

The investment component of permanent (read whole life) policies has merits in facilitating a disciplined investment schedule, ability to access surplus cash when needed, like retirement, and tax-efficient estate transfers. While all of these sound alluring, make no mistake: the primary purpose of permanent life insurance is still protection so that your dependents have financial security when you pass away.

Permanent insurance should not be treated as a primary investment vehicle. The return embedded in such policies, while guaranteed is usually modest. The built-in management fees are higher than what fund managers may charge. There is a cost (‘surrender charge’) to accessing such cash during your lifetime.

Premiums for permanent life insurance may be better deployed in alternative investment vehicles such as RRSPs, RESPs or even to pay down your mortgage. So if you have maxed out on some of those registered products, then whole life policies can be a good place to deploy some of your surplus cash.

How can I get permanent life insurance quotes?

If you are looking to purchase a permanent life insurance policy in Canada, there are many options available to you. As the best online life insurance brokerage in Canada, we have access to permanent life insurance quotes from the best life insurance companies in Canada. Schedule a call with one of our in-house insurance brokers so you can help you find the best whole life insurance quotes from leading Canadian insurance companies.

Do you still have some questions about the different types of life insurance plans out there? That’s understandable and exactly why we wrote the Honest Guide to Life Insurance. Check it out, or jump straight into our life insurance calculator to instantly see how easy it is to protect your loved ones for less.