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Whole Life Insurance for Doctors and Physicians in Canada
Learn more about how whole life insurance is important for doctors and physicians in Canada. Understand how you can access your wealth by investing your funds.
A doctor’s skill is their biggest asset, making them among the highest-paid professionals in Canada. However, this also means doctors must financially secure themselves against any unforeseen illness or injury.
In this article, we’ll explain why whole life insurance for doctors is important, and how it can help protect their future.
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What is whole life insurance?
Whole life insurance is a type of permanent life insurance that covers an individual for their entire life, as long as premiums are paid. Unlike term life insurance, which covers a person for a specific period, whole life insurance combines a death benefit with a savings component known as cash value.
So, how does whole life insurance work?
As a policyholder, you pay a monthly premium, and over time this money grows (cash value). Besides the cash value, you are also guaranteed a death benefit in the form of a certain amount of money for your dependents.
So, with whole life insurance, you’re not only saving money for the future, but you’re also making sure your loved ones are taken care of if something unexpected happens to you. It’s like having a financial safety net that grows over time while you take care of your everyday needs.
How are funds invested in a whole life plan?
The premiums paid into a whole life insurance policy are used in two ways. Part of the premium pays for the death benefit, while the remainder contributes to the policy’s cash value. Then, the insurance company invests these funds in assets like bonds, stocks, and real estate. The returns on these investments contribute to the growth of the cash value, providing you with a stable and predictable increase in your investment over time.
Let us understand this with the help of a case study:
Dr. Jane, a 35-year-old physician in Canada, decides to purchase a whole life insurance policy. She opts for a policy with a $1,000,000 death benefit. Her annual premium is $10,000.
How is the premium allocated?
✅ Death benefit portion
A portion of Dr. Jane’s $10,000 premium goes towards paying for the death benefit. Let’s say this portion is $6,000. This ensures that if Dr. Jane passes away, her beneficiaries will receive the $1,000,000 as a death benefit
✅ Cash value portion
The remaining $4,000 of her premium is allocated to the policy’s cash value (the amount that is invested)
✅ Investment of cash value
The insurance provider takes the $4,000 and invests it in a diversified portfolio, which might include:
- Bonds: Providing steady, low-risk returns (government bonds or high-quality corporate bonds)
- Stocks: Offering higher potential returns but with more risk. The insurance company might invest in blue-chip stocks or global equities
- Real estate: Offering stable, long-term growth (investments in commercial properties or real estate investment trusts (REITs))
✅ Growth of cash value
Let’s assume the insurance provider’s investments yield an average annual return of 5%. Here’s how Dr. Jane’s cash value grows over time:
| Year | Initial cash value investment | Return (5% of initial investment) | End-of-year cash value |
| 1 | $4,000 | $200 | $4,200 |
| 2 | $4,000 (from current year’s premium) | $410 (5% of $8,200) | $8,610 |
| 3 | $4,000 | $630.50 (5% of $12,610) | $13,240.50 |
✅ Stable and predictable increase
Over time, the cash value of Dr. Jane’s policy continues to grow predictably, thanks to the compounded returns from the insurance company’s investments. This growth is tax-deferred, meaning Dr. Jane does not pay taxes on the gains each year, which helps her cash value accumulate more efficiently.
✅ Benefits of cash value
- Borrowing against cash value:
After several years, Dr. Jane might need funds for an emergency or an investment opportunity. She can borrow against her policy’s cash value, which by then has grown significantly
- Supplementing retirement income:
As Dr. Jane nears retirement, she can use the cash value to supplement her retirement income by either taking loans or withdrawals from the policy
How does whole life insurance benefit doctors?
Whole life insurance offers several significant benefits to doctors, making it an attractive option for financial planning and security.
- Lifelong coverage: Provides coverage for the policyholder’s entire life. As doctors, this means your families will receive a guaranteed death benefit regardless of when you pass away, as long as premiums are maintained
- Tax-advantaged growth: The cash value component of whole life insurance grows on a tax-deferred basis, meaning you do not pay taxes on the gains within the policy as long as they remain invested. This provides a valuable source of funds you can access when you need it
- Estate planning: Whole life insurance is a powerful tool for estate planning. The death benefit from a whole life policy can be used to cover estate taxes, ensuring that your assets are passed on to your heirs without the burden of significant tax liability. For doctors with substantial estates, this can be particularly beneficial in preserving wealth for future generations
- Preserve small business tax rate: Since cash values within the policy are not subject to taxation unless withdrawn, there’s no declaration of passive income. This allows you to manage the small business income tax rate on your active income (such as practice income) more effectively. Typically, under current tax regulations, any passive investment income exceeding $50,000 could potentially trigger additional taxes on active business income. However, growth within a corporate-owned permanent life insurance policy is not considered passive income
- Income replacement: The death benefit from a whole life insurance policy provides a lump sum payment to beneficiaries. For doctors, this means your families can maintain their standard of living, cover daily expenses, and pay off any outstanding debts, such as mortgages or student loans. This financial security is crucial for doctors who often have high incomes that their families depend on
- Protection against market volatility: Whole life insurance offers a stable and predictable growth of cash value, which is not directly tied to the stock market’s fluctuations. For doctors seeking to diversify their investment portfolio and reduce exposure to market volatility, whole life insurance provides a reliable option, ensuring their investment remains secure, even during market downturns.
How can doctors access their whole life insurance policy’s cash value?
As a doctor, you can access the cash value of your whole life insurance policy in several ways:
- You can take out a policy loan, which uses the cash value as collateral. These loans typically have lower interest rates compared to traditional loans and do not require credit checks.
- Alternatively, you can make withdrawals from the cash value, although this may reduce the death benefit if the withdrawals are not repaid.
- Additionally, some policies offer the option to surrender the policy entirely and receive the cash value as a lump sum, though this should be considered carefully due to the potential loss of coverage and surrender charges.
Can incorporated doctors enjoy reduced estate tax through whole life insurance?
Yes, incorporated doctors can use whole life insurance to reduce estate taxes. By holding the policy within their corporation, doctors can fund the policy with corporate dollars, which are typically taxed at a lower rate than personal income.
Upon the doctor’s death, the death benefit can be paid out to the corporation and then distributed to beneficiaries tax-efficiently. This strategy helps minimize the tax burden on the estate and maximizes the amount passed on to heirs.
How much does life insurance cost in Canada?
Term life insurance in Canada typically costs around $10 monthly for $100,000 in coverage over a 10-year term, provided you’re in good health and relatively young (30-40s) and a non-smoker. However, this rate can vary based on different factors.
Know more about how much life insurance costs.
Frequently Asked Questions
What is the difference between term and whole life insurance?
Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years, and pays a death benefit if the insured passes away during the term. Whole life insurance, on the other hand, provides lifelong coverage with a savings component that builds cash value over time.
Is whole life insurance more expensive than term life insurance?
Yes, whole life insurance generally has higher premiums than term life insurance due to its lifelong coverage and cash value component. However, the additional benefits and investment opportunities can make it a worthwhile option for doctors.
Can I use the cash value of a whole life insurance policy for business purposes?
Yes, you can borrow against the cash value of your whole life insurance policy for various purposes, including business investments, practice expansions, or other financial needs.
How does whole life insurance help with retirement planning?
Whole life insurance can provide supplemental retirement income through policy loans or withdrawals from the cash value. This additional income stream can help doctors maintain their lifestyle during retirement.
- Whole life insurance ensures coverage for the policyholder's entire life, providing a guaranteed death benefit for beneficiaries
- The cash value component grows tax-deferred, offering a valuable source of funds accessible when needed
- Whole life insurance serves as a powerful estate planning tool, minimizing tax liabilities and preserving wealth for future generations
- By sheltering cash values from taxation, whole life insurance helps manage small business income tax rates more effectively
- The death benefit offers financial security to families, covering living expenses, debts, and maintaining their standard of living
