What are the Pros and Cons of Whole Life Insurance?

Understand Whole Life Insurance Before You Buy

Whole life insurance in Canada is the most secure and guaranteed permanent life insurance policy you can buy. With such guarantees there comes a cost, making whole life the most expensive life insurance you can buy. In this article we will explain why whole life insurance is more expensive than the alternative permanent life insurance policy, universal life, and how it can provide you lifetime security and guarantees.

Whole life insurance is the grandfather of all life insurance contracts. In fact some life insurance companies have been managing whole life insurance participating (par) funds for over 130 years for the benefit of Canadians. Even though whole life insurance goes in and out of vogue with investment trends it has always played a significant role in Canada’s life insurance industry. Here are the main pros and cons of whole life insurance.

Pros of Whole Life Insurance

Guaranteed Premiums, Guaranteed Cash Values, Guaranteed Coverage

Whole life insurance offers Canadians with iron clad guarantees. The premiums you pay are guaranteed never to increase, the policy is guaranteed never to be cancelled and whole life has a guaranteed cash value. You can even chose to quick pay your life insurance in say 20 years, fully guaranteed. You know that your premiums will never increase, regardless of financial markets or the performance of the life insurance company. Also, the guaranteed cash values will always be there, even if variable cash values through the payment of dividends were to disappear (very unlikely).

Dividend payments have given strong returns

Canadian life insurance companies that have been selling whole life insurance for many years have always been able to pay their dividends. A dividend is declared when the management of the participating (par) fund does better than the minimum guarantees it owes on the group of whole life insurance contracts. Since the guaranteed cash values are estimated on highly conservative assumptions, the par fund managers of life insurance companies have been able to outperform minimum guarantees over time and offer a dividend to policyholders. In fact, Canada Life, which has been managing the same whole life par fund for about 130 years now, has never missed paying a dividend to policyholders.

No ongoing management of investments

Because whole life insurance is guaranteed it is also very hands off for policyholders. The management of the investments is handled by a team of dedicated investment professionals. The par fund is kept separate from the capital reserves of the life insurance company, so you know that even if the insurance company runs into financial difficulty it cannot access the par fund for operating expenses. This gives whole life policyholders a lot of security. And the fact that investment management of the par fund has performed so well over the years is another feather in whole life’s cap. Companies like Sun Life and Canada Life have averaged a return on their participating fund of over 7.5% annually for the last 50 years. As your whole life insurance policy matures the cash values will become very large and your dividends will increase annually.

Cons of Whole Life Insurance

The most costly life insurance in Canada

With all these guarantees there comes a cost. The premiums charged for whole life insurance are higher than universal life because the guarantees are that the policy and the cash values will always be there, and the price will never increase. If you want cheaper permanent life insurance you will have to accept the risk of investment returns yourself and hope to manage your policy fund to outperform the markets. That is how universal life insurance works. In order to get a fully guaranteed policy the life insurance company MUST be certain it takes in enough premiums to meet all future obligations. That is why whole life insurance is expensive – but more than pays for itself over time.

Cash values take a long time to grow

The guaranteed cash values and dividends paid out of a whole life insurance policy are very small in the early years. It takes time for the cash values and dividends to increase. With universal life insurance the excess investment you put into your managed portfolio is seen immediately as cash value. Whole life insurance shows $0 or very little cash value in the first year, and over the first decade of the policy things tend to increase slowly. There is a big financial reward for “time served” and the cash values begin to grow very quickly as the policy matures.

No involvement in managing investment fund

The pro above of not being involved in investment management is a con down here where policyholders want to be in control of their investments. If you want access to equity markets, know how your money is being invested, and have control over the investment choices then whole life insurance is probably not for you. The investment management is a black box, and there is not a lot of transparency to understand how the dividend is arrived at. If you think you can achieve better investment returns by managing your own portfolio inside your life insurance policy, then universal life insurance is probably the best choice for you.

Learn more about the Pros and Cons of Whole Life Insurance

At Life Guard Insurance our team of life insurance brokers across Canada can design whole life insurance policies to fit a variety of needs. Please contact us and we will match you with an experienced life insurance broker who can explain the pros and cons of 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 the pros and cons of whole life insurance would be very much appreciated.

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