Beyond the Death Benefit: Explore the Other Benefits of Life Insurance
Taking care of loved ones has always been a meaningful and selfless reason to buy a life insurance policy. But when you choose whole life insurance, a form of permanent coverage that helps you preserve your wealth in a way that will benefit the next generation, you get much more than just peace of mind.
Consider all the things you want your money to do besides cover your living expenses and save for retirement. You might need:
- Access to emergency cash
- Money to pay for your kids’ education
- The chance to earn tax-deferred investment returns
- A guaranteed tax-free inheritance for your loved ones
All these goals can be achieved when you choose whole life insurance from Serenia Life.
This guide will explore the benefits of life insurance and how permanent life insurance combines the security of a guaranteed death benefit with lifelong advantages that only get better the longer you live. Let’s take a closer look.
Other Benefit of Life Insurance #1: Cash Value1 Growth
As long as you continue to pay your premiums (i.e., the amount you pay for an insurance policy), permanent life insurance never expires. From the first day you start making payments, you begin to participate in several wealth-building opportunities, including the right to earn dividends.
What are dividends2?
Each year, your insurance provider has the option of sharing a portion of its profit by issuing dividends to policy owners. This is why it’s called a participating policy: you get to “participate” in the profit sharing. If you receive dividends in any given year, you could:
- Use the dividends to reduce or cover the cost of your regular insurance payments
- Let them accumulate and earn interest
- Buy additional coverage
- Withdraw your money through a cash payout3
Impact of dividends on cash value growth
A portion of the payments you make for permanent life insurance get set aside in an investment account, where they can grow tax-free for the rest of your life.
You can also request that any dividend credited to your policy be used to purchase Paid-Up Additions (PUA)4. This option automatically purchases more insurance, which also comes with a cash value that accumulates on a tax-deferred basis.
Even better, if you decide to invest a little more money each month, you can take advantage of the Additional Deposit Option (ADO)5 and the extra cash will grow tax-deferred while benefitting from compound interest.
How can cash value grow over time?
The death benefit that you leave to your beneficiaries will always be paid out tax-free. However, the money you earn from the cash portion of a permanent life insurance policy can become taxable at different times in different ways.
For example, as a policy owner you can borrow money from the cash portion of your policy in the form of a loan6 that you give to yourself. The amount is not considered income, and therefore, you don’t pay tax. However, interest may be applied to the value of the loan, and if you don’t pay it back by the time you die, your death benefit could be reduced to cover the loan.
Putting it all together – A case study on compound growth
Imagine three Canadians at different stages of their lives who purchased $50,000 in coverage through a form of permanent life insurance called 20-Pay. They are required to make payments for 20 years, at which point the policy is considered “paid up” and will never expire. Over time, the cash portion will increase, multiplying in value. Keep in mind, you will not owe any tax on your earnings until a withdrawal is made.
In the first two examples below, an infant and a teen have been insured by their parents. The premiums are quite affordable because the children are young and in good health. The third policy has been purchased by a 25-year-old male who recently got married and wants to protect his new partner. The chart illustrates the monthly and all-time cost, the cash value of their policy at age 45, and how much more they would earn by taking advantage of PUA and ADO optional contributions.
| Policy 1 | Policy 2 | Policy 3 | |
|---|---|---|---|
| Policy Owner |
Jack is a newborn. His parents will pay the premiums. |
Sadie is 15. She’ll start paying her own premiums at some point. |
Darryl is 25 and he has purchased a policy for himself. |
| Monthly Premium |
$57.15 |
$76.05 |
$97.65 |
| Cost of Coverage (over 20 years) |
$12,700 |
$16,900 |
$21,700 |
| Total Cash Value at Age 45 | $66,564 | $39,706 | $26,704 |
| Maximum ADO* |
$27.08 |
$37.08 |
$58.75 |
| Total Monthly Cost |
$84.23 |
$113.13 |
$156.40 |
| Cost of Coverage with ADO (over 20 years) |
$20,215.20 |
$27,151.20 |
$37,536 |
| Total Cash Values with PUA and ADO at age 45 | $127,005 | $71,807 | $50,495 |
*While we have used the maximum ADO amount here to show the greatest growth potential, you can go as low as $5 a month, depending on your budget.
Just by taking advantage of PUA and ADO, each of these people saw significant increases in the amount of available cash at age 45.
Practical uses of cash value
The sooner you invest in a whole life insurance policy for yourself or your children, the sooner your savings will start to grow, thanks to compound interest. This could help you or loved ones achieve multiple goals throughout life. You could:
- Treat yourself to world travel
- Make a down payment on your first home or cottage
- Cover the cost of tuition
It’s your money, and you can borrow it at any time.
Other Benefit of Life Insurance #2: Policy Loans
Before you take any money out of the cash portion of your life insurance policy, review your needs with a qualified advisor. Make sure you understand how the loan will affect the value of your death benefit, the cost of borrowing, and the impact it will have on your heirs.
What are policy loans?
A policy loan is an agreement between you and your insurance provider. They agree to release a portion of your cash value in exchange for your agreement to pay it back or have the outstanding balance deducted from the ultimate value of your policy.
Benefits of using policy loans
Because you’re essentially borrowing your own money, there is little risk. This generally means you can pay it back on your own timeline, and the loan will not affect your credit rating. Just make sure to monitor your loan regularly to ensure your policy doesn’t lapse! This would only happen in the event your loan exceeds your policy’s cash value.
Drawbacks to consider
As with any investment, time is on your side when it comes to compound interest. When you reduce the principal amount of cash in your policy, there is less money to earn interest, meaning a smaller inheritance for your loved ones.
Policy loan rules across the industry
The Canadian insurance industry sets uniform rules for how policy loans can be made and paid back. In general, all loans reduce the death benefit, interest is commonly applied to the outstanding balance, and you’re free to pay the money back at your own pace.
Let us sweat the details
If you have a permanent life insurance policy and want access to some of the cash within it, a Serenia Life advisor will help you calculate the cost and reward.
Other Benefit of Life Insurance #3: Living Benefits
Permanent life insurance is guaranteed to come through for you and your family as a lump sum payout when you die. That’s a major source of relief and comfort. But between now and then, lots of things can derail your financial plan for a time, like an injury or a critical illness.
What are living benefits?
If your income gets interrupted because you can’t work or need time to recover, you could fall behind on your obligations, including the payments for your life insurance. This is why a robust insurance plan typically includes living benefits that can help replace income during your working years so that your long-term goals can still be achieved.
Living benefits include:
- Disability insurance
A disability is broadly considered any physical or mental condition that limits an individual’s ability to carry out important life functions or activities, like being able to work. This can include coverage for non-visible disabilities, including mental health conditions, chronic pain, chronic fatigue, or neurological disorders. - Critical illness
Critical illness insurance provides a one-time, tax-free payment that you and your family can use however you see fit. This includes many expenses not covered by government-funded plans, like physiotherapy, massage therapy, counselling, in-home caregiving services, or any other services you may need to cover out-of-pocket.
Can I use life insurance while I’m alive?
As we’ve already mentioned, a whole life insurance policy can be utilized while you’re alive, thanks to the cash value component you can access at any time. But there’s another scenario to consider.
In some cases, an insurance provider will allow a policy owner to withdraw money from their policy if they have been diagnosed with a terminal illness and are not expected to live beyond one year.7
Serenia Life’s Compassionate Assistance Program
In the unfortunate event a Serenia Life member is diagnosed with a terminal illness with a prognosis of one year or less, Serenia Life’s Compassionate Assistance Program (CAP) allows for a withdrawal of up to 50 per cent of the base death benefit or $50,000, whichever is lower, in the form of a tax-free payout.8
The money could be used to:
- Bridge income until the death benefit is paid out
- Allow family members to take time off
- Pay for quality hospice care
- Give relatives the means to travel and stay with the family at their time of need
Drawbacks to consider
This is not a decision to be made hastily. A policy owner who lives beyond the expected one-year timeline may be required to start paying the money back. Not to mention, the money you withdraw will be subtracted from the death benefit your loved ones receive. Of course, families navigating expensive medical bills or final good-byes often feel that the pros of a CAP outweigh the cons.
It’s important to understand that it’s best to make use of your whole life policy loan first, followed by a CAP withdrawal, if necessary. The reason is simple. Once you’ve used your CAP benefit, you will be unable to take out a policy loan if more money is needed. That’s because CAP comes with limitations, such as:
- The policy cannot be cancelled or partially surrendered
- Change of policy ownership is not allowed
- The death benefit cannot be changed
As long as you do things in the right order, you can maximize the money available to you via your whole life policy.
Serenia Life Member Benefits
As a member-based organization whose roots go back nearly 100 years, we encourage kindness by sharing our profits through community outreach, fundraising, and unique member benefits that help Canadians support their family, their community, and the causes they care about. The more we grow, the more we can give.
We provide members with access to a growing collection of member benefits that make a positive impact on their lives and the lives of others, including:
- $1,000 post-secondary scholarships
- $250 seed funding toward fundraising events
- Free digital wills (value: $189), or a reimbursement of up to $150 when you hire a lawyer to draft or update your will
Let us help
A multigenerational financial plan built on a foundation of permanent life insurance coverage can reward you with a lifetime of confidence, access to cash when you need it, and the gift of a long-term legacy. Starting early puts time on your side and lets the power of compound growth work for you and your loved ones. Now that you’re clear on the other benefits of life insurance, we’re here to help.
Talk to a Serenia Life advisor today about the benefits of membership and all the ways we can help you achieve your life goals.
Disclaimers
1 Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the policy’s cash value will reduce the available cash surrender value and death benefit.
2 Dividends are not guaranteed and are paid based on the overall experience of Serenia Life Financial, considering all risk factors. Dividends may be subject to taxation. Dividends will vary based on the actual investment returns in the participating account as well as mortality, expenses, taxes, lapses, withdrawals, and other experience of the participating block of policies. These factors have the potential to increase the value of your policy above the guaranteed amount, depending on the dividend option selected.
3 Policy withdrawal is an option to withdraw money from the accumulated cash value of the policy if Paid-up Additions or Accumulated Dividends is the selected dividend option. Withdrawals reduce the total cash value, affects future growth, and reduces the death benefit. If the withdrawal is only up to the amount that is paid in premiums (known as the adjusted cost basis), there won’t be taxes. Otherwise, there would be taxes on the portion that is more than the adjusted cost basis.
4 Paid-up Addition: With this dividend option any dividend credited to your policy will be used to purchase Paid-Up Additions. These Paid-Up Additions create an additional layer of permanent Whole Life insurance which increases the death benefit. The additional permanent insurance also has a cash value which can accumulate on a tax-preferred basis.
5 Paid-up Addition with ADO: Additional Deposit Option allows you to take advantage of the tax preferred savings room within a Serenia Life Financial Whole Life policy. By choosing this option, you can pay additional premiums over and above the required premium for your policy. Each of these premiums will be used to buy Paid-Up Additions, which increase the permanent protection available to you. These additional layers of coverage are combined with the Paid-Up Additions purchased with dividends to potentially accelerate your death benefit growth. Paid-Up Additions also have a cash value, which will also be increased when Paid-Up Additions are purchased with the Additional Deposit Option.
6 Policy loan is an easy way to access the accumulated cash value of the policy. A variable interest is charged on the amount borrowed. This may result in taxable consequences. Loan can be repaid at any time. Upon death and the loan is unpaid, the outstanding balance including any accumulated interest will be deducted from the total death benefit, with the remainder paid tax free to the beneficiary(ies).
7 A doctor’s note is required.
8 Cannot be direct result of attempted suicide or committing a criminal offence. Term life insurance policies must have at least 2 years until expiry date. After a partial payout is issued, the policy can’t be cancelled, partially surrendered, no policy loan, change of ownership, death benefit cannot be changed. If the insured lives longer than 1 year, interest payments will be required if accumulated interest exceeds 75% of death benefit. Other rules and limitations apply. Consult with your Serenia Life advisor for complete details.