Is It Worth Spending The High Cost For Whole Life Insurance?

Whole life insurance is the most expensive type of life insurance. Is it worth the investment?

If you have ever looked into the costs for life insurance, you will immediately see that a whole life insurance policy is much more expensive than a term 10 or term 20 life insurance policy. The basic reason for this is that whole life insurance is “buying” the life insurance dollars both now and into the future. Term life insurance is more like “renting” your risk protection for a set period of time.

In this article I would like to analyze the cost of investing into a permanent life insurance policy vs. putting the money into a savings plan, like an RRSP or a non-registered investment account. Whenever anyone is buying life insurance, either a permanent plan or a term insurance plan, they should have a need for financial risk protection. The major difference between term and whole life is that people looking to protect themselves from short-term needs, like paying off a mortgage or the time to raise children, would be better served to buy term life insurance. Those who need the insurance money to payout in the future for things like death taxes, creating a legacy, charitable giving, etc. should be looking to buy a permanent plan like whole life insurance.

So, if you can qualify for permanent life insurance, is the investment into a whole life insurance policy a better option than saving money in a registered or non-registered investment?

The costs and benefits of whole life insurance

We will firstly look at the costs and benefits of buying a whole life insurance policy to meet the need for permanent life insurance coverage. A few assumptions on a given scenario need to be made:

• Male, non-smoker, age 45, regular health
• Currently needs $200,000 of life insurance
• Life insurance need will grow as his estate taxes grow
• He will live to age 85 (life expectancy of a health 45 year old man)

For this man we will be looking at Canada Life’s Wealth Achiever product. I have found Canada Life’s whole life insurance to be one of the best in the Canadian life insurance marketplace. Even though their premiums are higher than the competition, the cash values and dividend payments are also higher. to showcase how strong their dividends have been over time, please see the Canada Life 2011 Dividend Scale report.

The Canada Life Wealth Achiever whole life insurance plan offers multiple dividend options. This is what you would like the company to do with your growing level of dividend payments on your whole life policy. Because our fictitious client above needs a growing level of life insurance coverage, we will chose the Paid Up Additions dividend option. This will instruct Canada Life to buy small, lump sum paid up chucks of life insurance each year as the dividend is paid out. Therefore the amount of life insurance our client has will continue to grow over time.

Finally, we will give this client 2 options – either pay the premiums for the rest of his life or pay for only 20 years and then be guaranteed to be finished paying and own the policy for how ever long he lives. The 20 pay option for whole life insurance is very popular as people can budget and know they won’t have to be paying premiums into retirement or if they lived too long.

Life time premiums for whole life insurance policy

If our client chose to have lifetime premiums, here is how his investment into whole life insurance would break down:

Annual premium	$5897
	Total Investment
Age 65	$117,940
Age 75	$176,910
Age 85	$235,800
	Cash Value	Death Benefit
Age 65	$157,296	$377,209
Age 75	$312,170	$526,107
Age 85	$544,442	$725,369
	Rate of Return
Age 65	10.1%
Age 75	6.3%
Age 85	4.9%

The internal rate of return is what you would have to get as an annual compound interest rate to generate that much money over time. The longer you live the higher the cost of the insurance, as you are continuing to pay annually on this policy, and therefore the lowewr your rate of return. In the early years the lump sum $200,000 death benefit creates the majority of the return on investment, and later on its the growth of invested money which gives you your returns.

20 Pay premiums for whole life insurance

If our client choses to pay iup his insurance in 20 short years, here is how his scenario would look:

Annual premium	$7,509
Total Investment	$150,180
	Cash Value	Death Benefit
Age 65	$198,121	$378,470
Age 75	$349,593	$541,527
Age 85	$576,468	$743,377
	Rate of Return
Age 65	8.2%
Age 75	6.2%
Age 85	5.2%

Since the initial investment for the 20 pay whole life insurance plan is higher, the rate of return is lower in the first 20 years, but higher over time as the payments stop but the policy and dividends keep growing.

Alternative 1: Invest into an RRSP

If our client decided to invest the same amount of money into an RRSP and not spend the money through retirement, how much would he have to leave to his heirs? Lets make a few assumptions again:

• Invests the higher amount of $7,509 for 20 years
• Annual rate of return of 6%, compounded annually
• Tax rate at death of 40%

Here is how the the RRSP investment would play out if he died at age 85, leaving the savings to his heirs

Total Investment	$150,180
Total tax sheltered savings	$835,770
Amount owing to CRA	$334,308
Net inheritance for heirs	$501,462

Alternative 2: Invest into a non-registered plan

If our client has maximized his RRSPs and can invest into non-registered funds, with the same annual growth rate, the taxation of the plan will be very different. Let’s assume that the investment doesn’t attract annual taxation (to keep the math simple) but gains above the initial investment amount will be taxed as capital gains (50% inclusion rate) at death. Here is how this scenario would play out (with the same assumptions as above):

Total Investment	$150,180
Account Value at Death	$835,770
Capital Gains Tax	$137,118
Net inheritance for heirs	$698,652

At least alternative #2 is closer to the whole life insurance payout, but for the same dollars invested you would be short $44,725. This is also assuming you can guarantee a compound annual 6% growth rate. The whole life insurance policy does have guaranteed cash values plus a historically stable dividend payment stream.

Conclusion – Whole Life Insurance is Worth It

As a safe investment option with immediate risk protection options, whole life insurance performs very well. You would have to guarantee high long-term returns in order to get a better after tax return than a whole life policy. Unfortunately, a guaranteed rate of return above 3 or 4% in Canada is not possible. Stock Markets are risky and there is a chance you will lose money, not make a profitable return. Whole life insurance still offers a long term, stable and attractive growth rate for people looking to invest into a plan for their estate and their heirs.

Here are the two Canada Life Wealth Achiever product illustrations for the above analysis:

Canada Life Wealth Achiever Whole Life – Pay for life – 45 year old man

Canada Life Wealth Achiever Whole Life – 20 Pay – 45 year old man

Life Guard Insurance can help you find a whole life policy to meet your needs

If you are interested in getting a whole life insurance policy for long term investment growth and tax sheltered payouts, please feel free to contact Life Guard Insurance. We can help you find a qualified life insurance broker who specializes in whole life insurance.

The article was written by Mitch Reynolds+. If you found this article interesting or it made you think, please feel free to share your comments below. Liking us on Facebook, giving us a +1 on Google or Tweeting this article about whole life insurance costs would also be very much appreciated.

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