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Whole Life Insurance - The Expensive Kind ... hear me out

calgary money advice estate planning financial planning insurance policy life insurance life insurance policy term insurance whole life insurance Jun 17, 2024
Young girl covering her ears

An overwhelming portion of Canadians do not need whole life insurance. It’s expensive, complicated, and more difficult to apply for than its more approachable peer, term life insurance.

But for those who need it, boy is it a wonderful wealth building tool!


First, Term Insurance

Term insurance is like renting; when you stop paying for it, the value goes away. Just like renting an apartment, you’re paying a monthly fee for the benefit of living there. When you stop paying rent, the landlord doesn’t let you keep a key.

Most people only need term insurance. When you have a mortgage, dependents, or want your family to be able to maintain their current quality of life if you die, term is the way to go.

I work with clients to develop an insurance strategy that covers their needs for the most vulnerable years and dwindles away when the kids are off to university and the final mortgage payment is made. At the end, you can cancel your term policy, say ‘thanks’ to your Higher Power (in that this has been the worst possible investment for you … evidence: you’re not dead), and move on with your life.


Whole Life is for the ‘Rich’

A whole life policy makes a lot of sense when you have more money than you’ll ever need; when you have the luxury of thinking about how rich your kids and their kids can be.

If your TFSAs and RRSPs are maxed, and you have a pile of non-registered investments sitting around, it’s a good sign that whole life insurance may be for you.

Whole life is a BRILLIANT tax shelter that truly can change your family’s financial tree forever. All life insurance pays out tax free, but a well planned whole life strategy in your ‘younger’ years (40s, 50s, 60s), can turn considerable taxable wealth into tax free money.


Whole Life is for Business Owners

If you own a business or have non-operational investments in a Holding Company, whole life insurance is for you.

It’s more complex of a subject than I will get into here, but the general premise is that you can buy a policy using corporately taxed dollars (generally a lower rate than your personal rate) and the benefits of the policy flow to your estate tax free, utilizing your business’ Capital Dividend Account (CDA).

You know how you get taxed on 50% of your capital gains? Well, it’s now 66.6%. “Thanks, JT!” 🙄

The other half (or third) of that gain is tax free. Think of it this way: if you sell a property for a profit of $300,000, 66% ($200,000) is included in your business’ taxable gain and taxed at your marginal tax rate.

What happens to the other $100,000 of profit? It goes into your CDA account, which isn’t a “real” thing; it’s a nominal (magic) number that your accountant keeps track of. And you can pull money out of your corporation through your CDA tax free.

Why does this matter to you and, more importantly, your estate? Because you can get a bunch of money out of your corporation, and to your beneficiaries, without paying tax on it.  

Name another (legal) way of doing that!


Whole Life Insurance is an Asset

Why are banks so eager to give you a line of credit on your home? Because it is secured against your home; a thing with real value.

Whole life insurance is the same - it has real value.

You can get a loan on your stocks, but they will only give you 50% of the value. You cannot get a loan on your Bitcoin. 🤷🏼‍♂️

‘Rich people’ and business owners buy these policies in the golden years of their careers and then borrow against them in retirement, to spend, buy boats, or gift grandkids with first home down payments. 

You don’t have to pay back the loan because the bank knows you’re going to die, so they’re happy to charge you interest and wait to collect when you die.

This is a gross oversimplification of a very complex subject, but if you have read this far, my goal has been achieved! The concept of whole life insurance gets written off too quickly, for two reasons:

  • “It’s a rip off! Just get the cheap kind and invest the rest.”
  • “It’s too complicated - not worth the effort.”

For the right people, those simple objections can cost you and your estate hundreds, thousands, even millions of dollars.

I have all the time in the world to talk about the Lakers, my kids and whole life insurance - please just reach out.

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