Understanding a whole life insurance policy before you purchase it

Purchasing whole life insurance is beneficial since it provides you peace of mind and secures your financial future. These policies are generally costly and you need to be sure that you can afford to pay the premiums in order to get the required coverage. Participating whole life insurance policies are expensive but they provide an annual dividend which increases the policy’s cash value. You will find some whole life insurance policies allow you the option to pay the policy off in 10, 15 and 20 years and retain protect the rest of your life.

Four benefits of whole life insurance

1. It is a good long-term investment option which will help you manage your finances efficiently.

2. This policy will remain active for your whole life and premiums will never increase.

3. Your beneficiaries will get a tax-free death benefit from the investment that you’ve made.

4. You will get guaranteed and growing death benefit with the help of whole life insurance.

Tax rules on whole life insurance in Canada

One of the most important feature of whole life insurance is that you have an in build investment in the policy when it comes to tax related matters. The policy collects the cash value with its normal insurance cost. This cash value can be seen as a sort of investment that helps you gain interest at a rate determined by the financial goals of the insurance company over a long term period.

Canadians get stable long-term investment growth with the help of whole life insurance policies. The stable and guaranteed long rate or return is very helpful in fulfilling your long term financial goals. The tax rules of permanent life insurance allow you to expand your investments and asset size while remaining fully tax sheltered – a more efficient investment.

Difference US and Canadian taxation of life insurance death benefits

In Canada the laws around the death benefit proceeds are very simple. All life insurance death benefits are paid out tax free. It doesn’t matter whether or not the proceeds go directly to a named beneficiary or whether they go to the estate. There is NO taxation of the death benefit of any life insurance contact in Canada.

US taxation laws are different. In the US there are estate taxes, which is a special tax levied on the heir’s inherited portion of the estate if the value of the estate exceeds a certain exclusion limit. If the life insurance contract is owned by the deceased (and most people own life insurance on themselves) then the death benefit proceeds can be included in the federal and state estate taxes. In order to avoid estate taxes on life insurance proceeds, the ownership of the life insurance policy must be transferred to another person three years or more before the person dies.

This creates problems for permanent life insurance contracts like whole life insurance because the cash value of the policy is also transferred away from the original investor/owner of the contract. The new owner could have a deemed taxable gain in being gifted the policy, unless they had paid a fair market value for the cash value of the policy back to the original owner.

Needless to say, whole life insurance is a very secured and tax-efficient investment policy in Canada. You will find that some people buy a whole life insurance policy due to the cash value that it builds up, whereas others may buy it for the permanent life insurance protection over their entire life. If a whole life insurance policy fits within your budget it can provide you with both lifelong insurance protection and a valuable tax-efficient investment option.

The article was written by K. Matthews. Mr. Matthews is a well-known writer from Denver who is associated with ampminsure.org. He loves to share his knowledge by writing insurance related articles. He has written various articles on insurance and how to manage money. 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 would be very much appreciated.

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