What is whole life insurance?

When you or the policy holder dies, the policy’s beneficiaries receive a tax-free death benefit—a lump sum payment (based on the amount of coverage you have chosen) that can be used to cover outstanding debt, tuition, mortgage payments or other expenses. 

What’s the difference between whole and permanent life insurance? 

Canadians have the choice between two broad types of life insurance—term and permanent. Whole life insurance is a subset of permanent life insurance, meaning the coverage doesn’t expire, provided the premiums are paid. As Jason Roy, senior managing partner at Adkins Financial in Brantford, Ont., puts it: “Whole life is permanent insurance.”

Universal life insurance also falls under the category of permanent life insurance. The largest difference between whole life and universal life insurance is that the death benefit and premiums can change with a universal life insurance policy. The latter also gives policyholders the ability to pick where the insurance company invests their money. 

Term versus whole life insurance

Term life insurance runs for a set amount of time—say, 10 or 20 years—and the premium may change when you renew, since your risk of death increases as you age. However, with whole life insurance, your premiums are locked in, Roy says. 

This is a big advantage that whole life insurance has over term life insurance, for which the cost of your premiums is likely to change when you renew for another term. Another plus with whole life insurance is that you never have to re-qualify for coverage, so even if you develop a condition, the cost of your premiums won’t increase. 

There’s another good thing about a whole life policy: it can generate a cash value over time. This means you may opt to cash out your policy if you decide at some point that you no longer require it. This is a marked difference with term life insurance, for which a policyholder receives no payout for a cancelled policy.

Whole life insurance policies may also offer more extensive options for riders—additional benefits that can be added to a policy to address specific needs and concerns, typically for an additional premium. Certain whole life insurance riders, such as a child death benefit, may not be available on a term policy. 

For more on how to choose between life insurance options, read our in-depth guide, “Term vs. whole life insurance: Which type of policy is best?”

How much life insurance do you need?

The answer to this question depends on the various expenses you’d like covered after you’re gone, such as funeral costs, day-to-day living costs for family members, and debts that will need to be paid off, like a mortgage. An insurance broker can help you with a life-needs analysis, but you can also get a pretty good estimate using an online calculator. 

On the other hand, you may not actually need life insurance. If you’re single and have no dependents, and you have enough money to pay your remaining debts and funeral expenses, it may not be worth it. Alternatively, if you do have dependents but have enough assets to support them after your death, you may want to opt out of life insurance altogether.

What factors into choosing or building your policy? Current savings, debt, children, funeral plans—all of these contribute to which policy you require. Then there are additional coverage options with riders, such as critical illness, disability, child death benefit and more. 

The younger you are when you obtain whole life insurance, the less expensive the premiums will be. As an example, Roy says if you’re a single 25-year-old renter with no children, you may not need coverage. But if you get married, buy a home and have children, the need for life insurance increases. He adds that although whole life insurance is an option, term life insurance might be a better option as you pay off your mortgage and the amount you owe decreases.

Your age and your overall health when you sign up for an insurance policy will determine your eligibility and your rates. “The younger you are usually [means] the healthier you are, so the cheaper the premium will be,” says Roy. For example, if you were to purchase a whole life insurance policy at age five, your rates would remain the same even when you’re 80. But if you purchase it at age 80, you’d be paying upwards of $1,500 a month for the same policy.

How much does a whole life insurance policy cost in Canada?

Life insurance coverage in Canada really depends on a variety of factors, including your specific needs in a policy and your stage of life. While it’s too complicated to know how much you’d pay as an individual without a detailed quote, it’s possible to calculate a hypothetical estimate. For men, a $250,000 benefit amount can be obtained in your mid-30s for approximately $161 per month. For women of the same age, the same benefit is approximately $139 per month. However, if you start a whole life policy in your 80s, the price can be upward of $1,500 a month. Rates for transgender and non-binary individuals are typically based on the sex identified at birth. 

Can you cash in your whole life insurance policy?

You may have heard people talk about “cashing out” their policies and wondered, “Can I cash out my whole life insurance policy”? The short answer is yes. 

One of the most attractive features of whole life insurance is that most policies have a feature called “cash value.” Typically, permanent insurance policies (including whole life policies) have a tax-sheltered investment component that grows over time. If you decide you no longer require a life insurance policy or need money urgently, you generally have several ways of accessing the cash value of your policy.

• In the most extreme circumstances, you can terminate the policy. This would involve cashing out (i.e., cancelling) the policy and getting the surrender value, which is usually the cash value minus any fees. In this case, your loved ones would receive nothing when you die.

• Instead of cashing out the policy, you can take out a loan against the cash value, using the policy as collateral.
• You can also avoid cancelling the policy by withdrawing some portion of the cash value. However, the size of your death benefit would then be reduced.

Note that there may be costly tax consequences if you take out a loan or cancel the policy, because your cash value is only tax-sheltered while in the account. You may, however, be able to withdraw some funds without tax consequences, depending on your policy. 

Do you need a physical for whole life insurance?

Whether or not you require a physical exam for whole life insurance is determined by your age, the amount of coverage requested and the existence of any underlying health conditions.. Each company uses its own criteria to determine whether or not you need a medical exam. But not having one could affect your coverage amount, as you will see in the below chart of industry averages, according to Adam Mitchell, president of Mitchell & Whale Insurance Brokers Ltd., in Whitby, Ont.

Don’t want to undergo a physical? Then you’ll have to request an amount of coverage that doesn’t require one, or opt for a policy in which it’s specifically indicated that a physical isn’t required. 

Whether you’ll be asked for a physical depends on the insurance provider and its initial assessment of your risks, according to Roy. But this isn’t always a bad thing. “If you’re above average health, your premium can go down. Your health is the number-one factor,” he says.

Can you be denied a whole life insurance policy?

There are no official statistics for people having been denied insurance coverage. But it does happen, says Roy. “I’ve had a couple of clients denied in my 20 years of working in finance and life insurance. It doesn’t happen very often. It’s more likely the client is rated high-risk and then the client decides to not take the policy.” 

General overall health, underlying health conditions and minor health issues that have gone untreated (which show you haven’t taken care of yourself) are a few of the reasons you could be denied. Other situations that could increase your chances of being declined include requesting coverage that far exceeds your needs without a valid explanation or being a participant in extreme activities that may cause death. (True, there is only one Richard Branson, but if you have a hobby or a job that puts your life at risk, it may affect your coverage.)

If you are denied coverage, you could choose to self-insure. This involves putting away a certain amount of savings per month with the explicit intention that it be used for expenses when you pass away. But that’s not always a financially sound plan. 

“People do say, ‘I could put away $25 a month instead of paying $25 for a life insurance policy,’ ” says Roy. “But if something happens to you tomorrow, an insurance policy is going to pay out $500,000. If you put away $25 [a month] for the past year, you’ve got $1,300.” 

The bottom line

If you want to secure your own peace of mind (and that of your loved ones), start by comparing the life insurance options available to you. If you find that whole life insurance is the way to go, apply for it while you’re still young and always be honest about your needs and circumstances with your broker or insurance company.

More on life insurance:

• How to choose a family life insurance plan in Canada
• Life insurance for kids: Do you really need it?
• How life insurance brokers get paid
• How much does life insurance cost in Canada?

About Sandra MacGregor

Sandra MacGregor has been writing about personal finance, mortgages, investing and credit cards for over a decade.

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