Whole Life Adds Long Term Value for Your Family
Whole life insurance is consider by many as the ideal plan when coverage is required for your lifetime. It offers a premium that will never change for your lifetime, can be paid for over a shortened period, e.g. 20 years being the most popular, and most plans build up a cash value that can never be reduced once allocated to the policy. This cash value can be borrowed, or used as collateral for a loan from a lending institution. Many clients will combine a whole life plan with some term, optimizing the cost of coverage, when you have both a short term 10-30 year need, and a lifetime need.
The Purpose of Whole Life Insurance
Whole life insurance is designed to provide coverage when the insured dies to help with ongoing expenses and provide income for loved ones. It is also used for paying estate taxes, and tax advantaged charitable giving, estates for children and grandchildren. Business owners also use it for a number of tax saving and wealth preserving strategies. It provides a guaranteed amount of insurance at a guaranteed price. Depending on the type of whole life insurance it can also provide an increasing amount of life insurance and safe returns on the savings portion of the monthly or annual deposits.
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How Whole Life Insurances Works
There are essentially four parts to whole life and universal life insurance policies. With whole life insurance, the insurance companies do not complicate things by breaking down what these costs are – you are only given what the monthly or annual premium will be while with universal life insurance these components are provided.
Mortality cost – This is the cost that the actuaries calculate will provide funds to pay the claims based on mortality tables.
Administration cost – The company assigns a cost for the administration plus the premium tax which is about 2% in most provinces.
Savings or investment – This is what is left over after the first two expenses are taken out of your premium.
Return on the savings – This is the interest rate that is credited to the cash value portion of your account each year. For whole life policies, it is called dividend for participating policies, or a performance credit with Manulife whole life, which works similarly to the participating policy’s dividend.
It’s worth noting that some policies guarantee that the above costs will not change and minimum savings or investment return can be speculated by policyholders.
Before the policyholder is accepted into a contract, they must go through the approval processes. There are three main kinds:
Fully underwritten processes: These processes require a lengthy application form as well as medical exams.
Simplified processes: These processes involve a few questions, but there is no exam involved.
Guaranteed processes: These processes do not require you to answer any question, and you are guaranteed to be accepted.
The Two Types of Whole Life Insurance Policies
These policies include a dividend (sometimes called dividend credit) each year based on the financial performance of the investments that the money paid by these policy holders achieves. Consequently, the face value of the policy will increase over the years if the policy holder chooses not to take the dividend as a cash payout which is one of the options but is seldom done.
If the fund does very well, some of the profits will be set aside to make up the difference in years when the fund may under-performs which tends to result in fairly stable dividend payouts. In the past few years due to low bond yields, the dividend scale for some insurance companies has been decreasing.
There is also a difference in how insurance companies pay dividends. Most insurance companies are stock companies or publicly traded companies whose shares are listed on stock markets. In this case, the profits flow to the benefit of the shareholders. For example, Manulife refers to their dividends as a performance credit and the amount of the credit is determined by the board of Manulife based on the returns of the pool and other factors.
Because there are a number of variables that are not fully guaranteed, we are unable to provide accurate instant quotes for this type of whole life insurance. We would welcome an opportunity to speak to you and provide examples of its many benefits and affordable premium options.
Non-participating whole life insurance policies guarantee the premium, cash values and amount of insurance your beneficiary will receive. All insurance companies provide an illustration that includes this information and the illustrated values are fully guaranteed. Usually it is for a set amount of life insurance and the face value does not increase as it does with participating policies. It will contain a cash value and this is a guaranteed cash value that can be accessed as a policy loan or if you collapse the policy (tax implications).
We have more Canadians accepting far more of this type of whole life as people want to be guaranteed they will get the amount of insurance they signed up for. The premium is often significantly less money than a comparable participating policy. We can provide instant quotes for this type of whole life insurance as it is fully guaranteed.
Non-participating whole life policies are frequently used to provide for final expenses and they tend to be of smaller face values which make them more affordable for growing families, retirees and seniors.
These policies also have quick pay options and you can get instant quotes for these options as well. They can be paid off in 10, 15, 20 years or paid up at age 65 years depending on the age of the person buying them. Obviously the quicker it is paid off, the higher the premium but the return on the higher premium can be significant as the cash values increase at a much faster pace. We have successfully developed many affordable plans for our clients where the premiums end at about retirement age.
Tips for Those Considering Whole Life Insurance
Due to the low returns and increased regulatory requirements on Canadian Life Insurance Companies we have seen three and four price increases on the cost of whole life insurance policies over the past several years. This increase in prices will continue and the product that we like the best at this time which does not show up on any quoting engines will be removed from the market at some point according to our inside sources.
There are a few remaining mutual insurance companies in Canada, such as Equitable Life, where the permanent insurance policy holders are actually shareholders in the company. Mutual companies do not have shareholders like public traded insurance conglomerates. In the case of a mutual company, if the returns in the “whole life pool” are not what the board would like, they can move some of the profits from operation into the pool to sustain the dividend scale. Not only that, given that policy holders are the company’s shareholders, if the company demutualizes, i.e. becomes a stock company, they will get paid as a shareholder based on a formula. When Manulife demutualized modest sized policy holders received well over $10,000 in shareholder value.
Many policies are illustrated assuming a historical dividend or performance credit level but in these times of reduced long term returns and increase regulatory requirements there is ongoing pressure to reduce these dividends and credits. Ensure the illustration includes what will happen if the dividends are less than projected and that you are comfortable with it. Our agents generally highlight the death benefits and cash values based on the current dividend scale minus 1%, historically shown to be conservative.
Many life insurance illustrations or policies will show two columns of cash values – one is guaranteed and the other is based on the dividends which are not guaranteed. Keep in mind, the guaranteed cash values, when shown are usually very conservative.
Whole life insurance is sometimes referred to as “cash-value life insurance”. This type of cash surrender insurance policy provides permanent insurance that will never expire plus a cash value that increases over time.
The cash value is available to the policyholder in the form of a loan, the most common, or actual cash withdrawal from the policy. When loaned, The policyholder is charged interest on the outstanding balance of the loan until the full amount is repaid. However, the interest rate is low compared to loans provided by other financial institutions.
The loan is also available regardless of the policyholder’s credit rating. If the loan is still outstanding when the policyholder dies, the beneficiary benefits are decreased by the loan amount in order to satisfy the loan plus accrued interest owed to the whole life insurance company.
If you want to get at the cash value without taking out a loan, one option is to use the cash value as collateral for a loan from a bank or other lending institution, while with some companies the only option to get access to the cash value is to cancel the policy. There may be tax owning on some or all of the cash value that is paid out. You should check with the insurance company to confirm the tax consequences of collapsing or cashing in a whole life policy.
Another advantage offered by most whole life policies is that the policyholders can stop paying monthly premiums for a time when financial difficulties arise. The cash value of the policy itself is then used to pay the monthly premiums in this case.