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- Whole life insurance combines lifelong coverage with a cash value component that grows tax-deferred
- Participating policies may also pay dividends, providing opportunities for reinvestment or liquidity
- Cash value can be withdrawn, borrowed against, or used as collateral for loans to meet financial needs like retirement, education, or business expansion
- Reinvested dividends can enhance the policy’s cash value and death benefit
- Why do you need life insurance?
- What is whole life insurance?
- How to use whole life insurance to build wealth?
- Whole life insurance for estate tax funding
- Retirement planning with whole life insurance
- Using whole life insurance for businesses
- Whole life insurance vs other investment options
- Can you make money on whole life insurance?
- Do wealthy people use whole life insurance?
- Common misconceptions about whole life insurance
- How long does it take to build up money in a whole life insurance policy?
- Frequently asked questions
Whole life insurance is a powerful financial tool that combines lifelong coverage with a cash value component that can be used to achieve various financial goals. By leveraging the cash value policyholders can supplement their retirement income, plan their estates, and even grow their business. In this blog, we’ll answer a question many Canadians ask: how to use whole life insurance to create wealth.
Whether you’re looking to enhance your financial portfolio or secure your family’s future, a whole life policy can help you achieve both these goals.
Why do you need life insurance?
Life insurance is essential for ensuring your loved ones are financially secure in the event of your unexpected passing. A life insurance policy can help cover expenses such as:
- Funeral costs
- Outstanding debts
- Mortgages
- Daily living expenses
- Children’s education
- Retirement planning
A life insurance policy is a versatile financial tool that brings financial protection and peace of mind to you and your loved ones.
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What is whole life insurance?
Whole life insurance is a type of permanent life insurance that offers lifelong coverage, has a death benefit, and a cash value component, all of which remain active as long as premiums are paid. With its investment component, a whole life policy offers a unique blend of stability, growth, and flexibility, making it a powerful financial product.
The death benefit is the amount paid to beneficiaries upon the insured’s death, while the cash value is a savings feature that grows over time, offering guaranteed returns.
Key features of whole life insurance
The features of a whole life insurance policy can be different based on whether it’s a participating or non-participating policy. Participating policies allow policyholders to receive dividends, which can be used to reduce premiums, purchase additional coverage, or be taken as cash.
These dividends are not guaranteed but depend on the insurer’s financial performance. In contrast, non-participating policies do not offer dividends but often come with fixed premiums and guaranteed benefits, providing more predictable coverage.
Both types offer lifelong protection and a cash value component, but the choice depends on individual financial goals and risk preferences.
Features of a participating vs. non-participating whole life policy
| Feature | Participating Life Insurance | Non-Participating Life Insurance |
| Definition | Offers dividends to policyholders based on the participating account’s performance | Does not provide dividends; only offers guaranteed death benefits |
| Premiums | Higher due to the potential for dividends and additional benefits | Lower as it only includes guaranteed benefits and no profit-sharing |
| Dividends | Policyholders may receive dividends | No dividends are paid to policyholders |
| Cash Value Growth | Cash value grows faster | Cash value grows at a fixed rate |
| Suitability | Suitable for individuals seeking long-term growth | Ideal for those wanting a straightforward, cost-effective policy |
How to use whole life insurance to build wealth?
A whole life policy can help build wealth because of the two key components it offers: cash value for both participating and non-participating policies, and dividends for participating policies only. Policyholders can leverage either of these two components to create a source of income for various financial goals, supplement retirement income, fund large expenses, and even invest in new businesses.
The cash value component and dividends (for participating policies) can be accessed in different ways. The cash value can be:
- Withdrawn
- Accessed as a policy loan
- Used as a loan collateral
Withdrawing the cash value and taking a policy loan can be taxable if the amount exceeds the policy’s true value. When you use it as a loan collateral with a third party lender, it is not taxable.
Accessing cash value and its implications
| Cash withdrawal | Policy loan | Collateral loan | |
| Ideal for | Policyholders who want a small amount of cash for immediate use, and who may not intend to repay it | Policyholders who want a larger amount of cash and want to avoid a loan from a bank or other lender | Policyholders who want a large amount of cash and are comfortable with debt |
| Cash withdrawal/loan limit | Limited to the available non-guaranteed cash value | 90% of available cash value | 100% of available cash value |
| Intention to repay | Never | Typically in the short-term | At death |
| Tax implication | Taxable if the withdrawal amount exceeds the policy’s true value | Taxable if the withdrawal amount exceeds the policy’s true value | Not taxable |
Dividends on the other hand can be used in two different ways:
- Policyholders can reinvest the dividends into their policy (enhanced protection and paid-up additions)
- Get paid in cash or hold on deposit
When the dividends are reinvested into the policy, they are not liable to any taxes. If the policyholder chooses to get paid in cash or hold the dividend payout on deposit, it is subject to taxes.
| Feature | Reinvest dividends | Receive dividends in cash or hold on deposit |
| Purpose | Increase policy value through enhanced protection or paid-up additions | Provide liquidity for immediate use or savings |
| Impact on policy | Boosts the death benefit and cash value of the policy | No impact on the policy’s value |
| Tax implications | Not taxable when reinvested into the policy | Subject to taxes if received as cash or held on deposit |
| Ideal for | Policyholders looking for long-term growth and enhanced financial security | Policyholders seeking additional income or liquidity |
| Flexibility | Funds stay within the policy and contribute to future growth | Offers immediate access to funds for any purpose |
Whole life insurance for estate tax funding
When you pass away, it is assumed that you have disposed of all your assets and an executor will be required to pay any taxes before your estate is distributed among your beneficiaries. These assets include any Registered Retirement Savings Plan (RRSPs), capital gains, and more.
The substantial value of these assets are also subject to the highest tax rates. Paying off these taxes significantly reduces the value that your beneficiaries get.
If you pass away with an active whole life insurance policy, your beneficiaries (such as surviving family members) receive a tax-free cash payout from your insurance company. This payout is not considered part of your income or your beneficiaries’ incomes and is not taxed as such when you pass. This is because you paid your life insurance premiums using funds on which you paid income tax as well.
The payout from your whole life insurance policy offsets the taxes on your estate and provides immediate liquidity to meet any other estate settlement costs.
Retirement planning with whole life insurance
While the primary purpose of a whole life policy is the death benefit, retired individuals can use the cash value component and the dividends to supplement their income. The cash value serves as an emergency fund that can be used for medical emergencies, paying off debt, travelling post retirement, children’s weddings or education, and more.
The dividends can be reinvested in the policy to increase the death benefit and to buy additional coverage. This will enhance the legacy a policyholder leaves for their loved ones. Depending on the dividend strategy, policyholders can also access it as cash when required.
Using whole life insurance for businesses
Whole life insurance offers several benefits for business owners, including key person insurance, funding a buy-sell agreement, and serving as collateral for a business loan. A whole life policy ensures the stability and continuity of business operations. Here’s how:
Using whole life insurance for a business
| Aspect | Purpose | Benefit |
| Key person insurance | Protects the business against financial losses that could
result from the death of a key employee or owner |
Provides the business with a death benefit to cover the costs
of finding and training a replacement, offsetting lost revenue, and maintaining business operations during the transition period |
| Funding buy-sell agreements | Facilitates the smooth transfer of business ownership in the
event of an owner’s death |
Ensures that the remaining owners can buy out the deceased
owner’s shares without financial strain |
| Collateral for business loans | Provides a means to secure financing for business operations
or expansion |
The policy’s cash value can be used as collateral to obtain
business loans, potentially at more favorable terms |
Diversify your investment portfolio
A whole life insurance policy is a reliable way to diversify your investment portfolio. It offers stability and guaranteed cash value growth and death benefit, making it a more stable investment as compared to market-dependent assets.
Whole life insurance keeps you protected against market volatility especially during downturns.
Whole life insurance vs other investment options
When compared to other investment options such as stocks, bonds, or real estate, whole life insurance proves to be a lower risk choice. This is because of the guaranteed cash value and dividends (in case of participating policies).
Here is how whole life insurance compares to other investment options:
Whole life insurance vs other investments
| Feature | Whole Life Insurance | Stocks | Bonds | Real Estate |
| Market dependency | Not dependent on market performance | Highly dependent on stock market performance | Dependent on interest rate environment | Dependent on real estate market conditions |
| Risk level | Low risk | High risk, subject to market volatility | Low to moderate risk, depends on issuer | Moderate to high risk |
| Cash value | Guaranteed, grows tax-deferred | Potential for high returns, but with high volatility | Fixed returns, generally lower than stocks | Potential for appreciation, but can be unpredictable |
| Liquidity | Moderate, can borrow against or withdraw from cash value | High, can sell stocks quickly | Moderate, can sell bonds, but may incur penalties | Low to moderate, depends on market conditions |
| Tax implications | Cash value grows tax-deferred; death benefit is tax-free | Capital gains tax on profits | Interest income taxed as ordinary income | Capital gains tax on property sales; rental income taxed |
| Income generation | Can borrow against cash value or withdraw for income | Dividends, selling stocks | Interest payments | Rental income or profits from sale |
| Protection / Guarantee | Death benefit is guaranteed | No guarantees, subject to market risk | Principal and interest typically guaranteed | No guarantees, subject to market risk |
| Ease of Access | Accessible via loans or withdrawals, but may reduce benefits | Easily accessible, can trade on stock exchanges | Accessible but may involve penalties for early withdrawal | Low accessibility; selling property takes time |
Can you make money on whole life insurance?
Yes, you can make money on a whole life insurance using the cash value and/or the dividends your policy generates. Both cash value and dividends are living benefits and can be accessed in different ways.
While the cash value is technically a portion of your death benefit, accessing it as a policy loan that you repay will ensure your policy’s value remains intact. You can use your cash value to for any small or large financial needs such as:
- Medical emergencies
- Weddings
- Children’s education
- Supplementing retirement income
- And more
The dividends can either be reinvested into the policy or taken as cash or deposit. If you take the dividends as cash or deposit, they may be subject to tax. Dividends can be used for similar purposes as cash value.
Do wealthy people use whole life insurance?
Yes, wealthy people use whole life insurance to grow, protect, and transfer their wealth. The death benefit from a whole life policy is tax-free, making it an ideal inheritance for the wealthy. High-net worth individuals with a whole life policy that has a significant cash value component can use it to invest in their businesses, take out a collateral loan, plan their estates, and more.
Common misconceptions about whole life insurance
Whole life insurance is often misunderstood due to its complex nature and the different investment options it offers. Some of the common misconceptions about whole life insurance are:
- It is too expensive: The high premiums of a whole life policy include the death benefit and the cash value or dividends. The investment components also grow in a tax-deferred manner, offsetting the high initial premium costs
- Other investment options are better: Unlike stocks, bonds, mutual funds, and real estate, whole life insurance is not subject to market risks. It is a less volatile investment option
- Whole life insurance is for the wealthy: This is a common misconception owing to the high premiums. But whole life insurance is for anyone who is looking for lifelong protection with guaranteed returns
How long does it take to build up money in a whole life insurance policy?
A whole life insurance policy typically starts building cash value after a few years, often around the second or third year of the policy. In the early years, most of the premium payments go toward covering the cost of insurance and administrative fees.
The growth of cash value depends on the policy’s design, premium payments, and investment performance within the insurer’s portfolio. The timeline varies based on the policy structure and premium allocation.
- Early years: Some cash value is generated, but most of the premium amount goes towards administrative costs
- 3-5 years: Cash value begins accumulating meaningfully
- 10+ years: Cash value growth accelerates, benefiting from compound interest
Start building wealth with whole life insurance
A whole life insurance policy is more than just a safety net for your loved ones—it is a versatile financial tool that offers guaranteed growth while you are alive. If you want to build wealth with a whole life policy but are unsure of how to go about it, schedule a call with one of our licensed advisors.
Frequently asked questions
How can I use the cash value of my whole life insurance policy to fund my retirement?
The cash value of your whole life policy can supplement your retirement income and help meet immediate financial goals. It can be accessed through loans or withdrawals to maintain your lifestyle post retirement, travel, and more.
What are the best strategies to create generational wealth with whole life insurance?
Whole life insurance can create generational wealth by providing a guaranteed, tax-free death benefit to your heirs. You can also use it to fund trusts or cover estate taxes, ensuring your assets are passed on intact. Additionally, reinvesting dividends and growing the cash value increases the policy’s long-term financial benefits, securing wealth for future generations.
How does whole life insurance compare to other investment options for wealth building?
Whole life insurance offers guaranteed returns, tax advantages, and lifelong coverage, making it a low-risk, stable component of a diversified financial plan. Unlike stocks or real estate, it is not subject to market volatility and provides a predictable way to build wealth.
Can I use whole life insurance to fund my children’s education expenses?
Yes, the cash value of a whole life insurance policy can be accessed to fund education expenses. You can withdraw or borrow against the cash value to pay for tuition, books, or other costs.
What are the tax implications of borrowing against the cash value of a whole life insurance policy?
Borrowing against the cash value is generally tax-free as long as the policy remains in force. However, if the policy lapses or is surrendered, the loan amount exceeding the adjusted cost basis may become taxable as income.
Whole life insurance is a versatile financial tool that offers lifelong coverage, a guaranteed death benefit, and a cash value component that grows over time. This policy can be leveraged to build wealth, supplement retirement income, fund large expenses, or support business operations. Participating policies also offer dividends, which can be reinvested to boost policy value or accessed as cash. Whole life insurance is ideal for estate planning, generational wealth creation, and providing financial security to loved ones.
