What is Whole Life Insurance?
Whole Life insurance is a permanent type of life insurance policy where payments are made for a number of years and there is a minimum guaranteed amount paid out when one dies.
Why people purchase whole life insurance policies
- Provide for final expenses
- Top up a savings or investment pool when the first spouse passes. A safety net in case either returns are less than expected or expense are more than expected.
- Pay tax due upon death – for example, capital gains on a cottage or investment real estate.
- Create an estate – there is an immediate estate created in the amount of the policy face for a relatively small monthly payment.
- Maximize an estate – create a larger estate where the monthly payments for insurance result in guaranteeing a larger immediate estate
- Provide an endowment to a charity – this can create tax credits either annually or at death.
It has the following features:
The Minimum face amount of the whole life insurance policy is fully guaranteed.
One can purchase a whole life policy that will pay out a specified amount (face value) on death or one that will increase in value depending on the dividends paid by the company.
A whole life insurance policy will have a minimum guaranteed cash value.
The cash value is the amount within the policy that the policy holder can access through a policy loan or withdraw if they cancel the policy.
The annual increase in cash value of whole life insurance policies is determined by two factors – a small guaranteed payment plus a dividend that is determined by the insurance company. The amount of the dividend is a function of the design of the whole life insurance policy and how the pool of money that whole life insurance policy funds are invested in performs. It is managed by the insurance company. It is normal to withhold some of the returns in good years to top up returns in poor years. A mutual company may also use earnings from other operations top up the performance as the whole life policy owners are, in effect, the insurance company owners. If possible purchase a whole life policy from a mutual company. If they choose to demutualize like Manulife and others did, then shares are issued as the owners of permanent insurance policies for the value of the company.
The design of the whole life policy is generally one of two types. Some policies are priced to have minimum cash value but provide the guaranteed face amount at a reasonable price and others are priced to provide a higher cash value and even an increasing face value. The latter can be used for strategies requiring an increased cash value and policy face and they take better advantage of the higher returns being enjoyed by these policies.
Whole life insurance is becoming a favorite as the dividends for many companies are averaging over 6.5% in a climate where these returns are very rare and this growth is essentially tax free if one does not cash in the policy.
Premium is usually guaranteed
Whole life insurance policies almost always have a fully guaranteed premium
The amount paid monthly or annually is usually guaranteed to remain the same for the payment term. It is a contract between the insured and the company that only the insured can cancel.
The payment period is usually for 10, 15, 20 years or for life. If one has the cash flow, a very good case can be made to take the shortest payment period.
Cash value of whole life insurance policies can be accessed by way of a policy loan
You can access the cash value through a policy loan at an interest rate as defined by the contract and it usually reflects current rates. Be careful, as dividend payments can be decreased in some policies when policy loans are in effect.
There are strategies where one puts as much into a whole life policy so the cash value grows quickly and then the cash value is used to finance education, a new home down payment etc. with a payment plan to repay the loan back to the policy instead of borrowing from a financial institution. When you borrow and pay back to the policy with interest it is better you effectively gain the interest instead of the financial institution. This is a specialized use of these policies and it only works with a few companies so you need to talk to an expert in this strategy. We can refer you to an expert in this very interesting strategy at insurance direct Canada.
Whole life insurance used to be considered a poor choice when the returns in the stock market were double digit but with good stable returns it is becoming a favorite choice for many. Many people would now exchange their market driven investment performance for a stable return of 6.5% or higher over a life time.
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