Whole Life Insurance Explained
Whole Life Insurance is the most popular type of permanent life insurance in Canada. This type of life insurance is also the most confusing type of insurance because there are many different elements to a whole life policy.
Let’s breakdown some of the important points about whole life coverage:
What It Covers
- This type of insurance is meant to cover lifelong needs such as funeral expenses, estate taxes, or leaving an inheritance
How The Coverage Works
- Your premium is based on how much coverage you would like to apply for, your premium will never increase in the future, and your coverage should never decrease in the future
- There are policies where you can pay for life (until you pass away), and there are also policies where you can pay up the policy guaranteed in as little as 8 years – the shorter the payment period, the more expensive the premiums
How Is My Premium Allocated
- A part of the monthly premium is allocated to the Cost of Insurance, and a part of the monthly premium is allocated to the Participating Investment Account
Participating Investment Account
- Most whole life policies have what industry pundits call a “Par” account – the insurance company runs this massive investment account, and of course they are trying to drive performance and outperform other PAR accounts
- Most whole life insurance pays dividends on the policy anniversary, these dividends grow the cash value, and can even result in the coverage increasing. The better a PAR account performs, the larger the annual dividend will be
- Most insurance companies let you select from 2-4 different dividend options:
- Cash – you can take dividends in cash, tax is likely owed on growth
- Paid-Up Additions – you can reinvest dividends into the insurance policy, doing this means you pay no tax, and the dividends also help grow your coverage amount
- Enhanced Coverage – this dividend option allows you to buy additional insurance at a low cost, and the policy also leverages Paid-Up Additions at the same time to slowly shrink the Enhanced Coverage portion
- Premium Reduction – you can instruct your dividends to pay for the policies actual premiums, meaning you could pay little or nothing for your life insurance policy
That is just some of how the base coverage works, there is also a host of other additional option called riders.
Whole Life Riders & Supplementary Benefits
While researching life insurance, you may have come across references to riders and supplementary benefits. Basically, these are “extras” that can be added to life insurance policies to better address a client’s life insurance needs. Usually, they are added to a policy at the time that it is issued, but sometimes they can be added to an existing policy. Typically, these supplements require additional premiums. In this article, we’ll discuss the most common types of rider, and discuss how they can help you meet your unique insurance needs.
Term Life Insurance Riders
A term rider adds additional life coverage to a life insurance policy for a limited amount of time. This kind of rider can apply to the primary life insured on the policy, or to another person. You might decide to purchase a permanent life insurance policy to cover your long-term insurance needs, and add a term rider to address your shorter-term needs. Another use of term riders is to add coverage for family members, such as a spouse or children. By adding a child or family rider to an existing policy, the policyholder only has to manage one policy and pay one premium, which is more convenient.
Usually, term riders come with a conversion option, whether the rider covers the primary life insured or a family member. The conversion option is usually available at any time, until coverage under the rider expires. This option allows a rider to be converted to a stand-alone, permanent life insurance policy.
Accidental Death & Dismemberment Rider
An accidental death rider provides additional coverage if the life insured dies as a result of an accident. Some insurance companies provide accidental death coverage in units (e.g. in multiples of $10,000), while others provide coverage as a multiple of the death benefit.
A death is accidental if it occurs as the result of an unexpected traumatic or violent event. Typically, accidental death riders exclude deaths that result from suicide, self-inflicted injuries, war, or the commission of a crime. Sometimes it can be difficult to determine if a death was accidental. In some cases, an autopsy or coroner’s report may be required.
Accidental death riders may limit coverage to certain ages. For example, AD coverage may need to be applied for before the life insured reaches a certain age. This coverage may also only extend to a certain age, such as 65.
Guaranteed Insurability Benefit Rider
A guaranteed insurability benefit (GIB) rider gives the policyowner the option to buy additional life insurance coverage in the future without providing proof of insurability. The premiums for the additional coverage will be based on the age of the life insured at the time that the option is exercised, but will assume that their health has not changed. GIB riders can be very useful for clients who either do not yet need or cannot afford a larger coverage amount, but who expect their insurance needs to increase in the future. A GIB rider guarantees that the life insured will be able to obtain additional coverage even if their health status worsens.
GIB riders often have several restrictions. For example, the option to increase coverage may only be permitted at certain policy anniversaries, or for a certain dollar amount. GIB riders typically expire when the life insured reaches a certain age.
Business Growth Protection Rider
The business growth protection rider functions in much the same way as the GIB rider. It allows for corporate policyowners to purchase additional coverage when the life insured’s share of the business grows in value, without providing evidence of insurability. As with a GIB, the new coverage will be priced based on the insured person’s current age, but will assume that their health has not changed.
This type of rider may have similar restrictions to GIB riders, depending on the insurance company. The option to increase coverage may only be exercised at certain policy anniversaries and for certain specified amounts up to a maximum. Typically, the business growth protection rider is available for either a 10 or 15 year term.
Critical Illness Insurance (CI) Rider/Benefit
This benefit allows the policyholder to receive a benefit if the life insured is diagnosed with a critical illness specified in the contract. The critical illnesses covered vary based on the insurance company, but most will cover at least the “Big Four”: heart attack, stroke, coronary bypass surgery, and life-threatening cancer. Some companies cover other conditions as well – the number of covered conditions may be as many as 25 or more.
The CI benefit is usually paid out as a lump sum, after any waiting period has been satisfied. This payout may be an acceleration of the death benefit, meaning that when the life insured passes away, the death benefit will be reduced by the amount already paid out. However, some CI riders act very similarly to stand-alone critical illness policies, and do not reduce the death benefit.
Premium Waiver Benefits
The most common of these is the waiver of premium benefit for disability, under which the insurance company will waive the premiums on the policy if the life insured becomes totally disabled. The definition of total disability may vary based on specifications in the policy, and there will be a waiting period also specified in the policy. Some policies will waive the premiums from the start of the disability, while others waive premiums only after the waiting period has been satisfied. Premiums will be waived for as long as the life insured remains disabled.
Another type of premium waiver benefit is the parent/payor waiver benefit. This benefit works in much the same way as the disability waiver benefit, with a couple of differences:
- Depending on the policy, the premium may be waived upon the policyowner’s death as well as upon their disability
- If the life insured is a child, some policies state that the premium will be waived until the life insured reaches a specified age, such as 18 or 25
If you have any questions about whole life insurance please reach out to us, we’d be glad to help!
About the Author
Jordan Richardson, B.Sc, LLQP, QAFP™
Founder - NorthWise Insurance
Jordan was born in London, Ontario, but has lived all over the province, spanning from Windsor to Sudbury. He graduated with Honours, Bachelor of Science (B.Sc.) in 2013 from the University of Waterloo, and quickly pivoted away from science and to the financial services industry. Jordan acquired his Life Licence Qualification Program (LLQP) in 2014, and more recently obtained the Qualified Associate Planner (QAFP) certification. Jordan is currently one exam away from his Certified Financial Planning (CFP) designation, and the Chartered Life Underwriter (CLU) designation. With early success in the financial service industry, Jordan quickly was thrust into management roles, specializing in team building through creating great work culture, and in digital marketing strategies. These skills were utilized in the creation of NorthWise Insurance, where the goal is geared towards an omnichannel advice platform that offers a wide range of financial products, all available digitally.
Jordan is engaged, and has two beautiful daughters. He is the Chair of the Young Professionals Association (YPA) of Sudbury, and mentors a little brother in the Big Brothers, Big Sisters Program. When Jordan isn’t working or with his family, you can find him on the golf course or playing basketball.