Let's start simple.
There are two main types of life insurance that Canadians can purchase:
Term Insurance
Permanent Insurance
Whole life, which is the product you're going to learn about momentarily, is a form of permanent insurance.
It's also a life insurance product that many Canadians use to build wealth.
However, let me preface with this...
"Whole life insurance should be purchased primarily with the intention of protecting your loved ones. The wealth accumulation aspect of whole life should be treated as an added benefit."
Here's how it works.
With a whole life insurance product, you start by speaking with a life insurance broker or agent, and pick a base amount of coverage you want to have.
Let's say your base amount of whole life coverage is $100,000.
Next, your life insurance broker will quote you with a few different insurance companies that you can place your policy with.
Each one of these insurance companies will have their own "dividend scale". The dividend scale represents a projected return (represented as a percentage), that the insurance company will provide as a dividend to their policyholders at the end of each fiscal year.
*IMPORTANT*
Dividends are not guaranteed!
Although insurance companies do their best to provide a dividend to their policyholders, they do not guarantee them.
Let's assume that you've had your $100,000 whole life policy in force for 1 year, and your insurance company projects a 6% dividend return.
What will happen is, each year that your policy is in force, you're building up your "cash value" account within your life insurance policy. Imagine a savings account, but with your insurance company.
Each year this 6% projected return will be deposited into your cash value account automatically. Returns are accumulated annually on a tax-deferred basis.
This is the wealth building component of whole life insurance!
The savings inside your cash values accumulate annually, sheltered from tax, so long as your policy is in force.
The policyholder is free to use these cash savings however they wish if they decide to withdraw from this account.
Many Canadians will use whole life insurance as a way to build up enough cash to pay for things like education costs, or even for a down payment on a property!
Here's a common scenario:
John and Mary are married with a newborn child.
They contact their life insurance broker, and tell him that they want to ensure their child is financially secure in the event that they both pass. John and Mary also mention to their insurance broker that they enjoy investing their money, and contribute to their TFSAs and RRSPs on a regular basis.
They plan to send their child to university once she's completed high school, but would rather not use the savings in their TFSAs or RRSPs. In addition, the savings they accumulated in their RESPs will not be enough to cover the education costs in mind (MBA program, PHD program, etc...).
After speaking with their life insurance broker, they each purchase a $100,000 whole life insurance policy.
Looking at the policy details, when John and Mary turn 48, they will expect an accumulated cash savings of $30,000 and $40,000 respectively, in their whole life policies. Their daughter will be 18 years old at this time and starting university.
That's a total cash accumulation of $70,000.
John and Mary will be able to withdraw from this cash savings to pay for their child's education expenses, without having to deplete any of their own RRSP and TFSA savings.
Cool right?
How about a real life example?
A client of mine purchased $100,000 of whole life at 29 years of age. He applied what's called a "20-pay" option to his policy - meaning that he will completely payoff his whole life policy after 20 years, but continue to receive any annual dividend payments and guaranteed cash values for the rest of his life.
Here's what the projected cash values of his policy will be when he's 50 years old:
A few disclaimers here:
**As I mentioned earlier, annual dividend returns are NOT guaranteed. In the worst case scenario, there will be no dividend.**
**Whole life insurance is typically more expensive than term insurance.**
**The CRA recognizes the withdrawal of cash from a whole life policy as income, therefore income tax must be claimed**
There are strategies for deferring income tax on the withdrawal of a whole life policy, however for the sake of this article they will not be discussed here.
Whole life insurance gets some slack from time to time, however if used with the correct intention, it can be a powerful tool for leaving a legacy behind for the ones you love, while reaping the benefits of increasing wealth.
If you have questions about how whole life insurance works, don't hesitate to give me a call directly at 647-393-3474, or complete the 1-minute intake form below!
Thanks for reading!
Best,
Dan
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