A Guide to Cash-Value Life Insurance in Canada
A cash-value life insurance policy is one part guaranteed life insurance and one part investment component, which provides you the opportunity to grow your money and access it later.
Life insurance isn’t the only element of a plan that parents and partners put in place to secure the future and financial security of their loved ones. But its role in any form of financial planning is simple: The death benefit (i.e., a payment made to designated family members, other loved ones, or the charity of your choice after you die) keeps money flowing into the household when one person dies so that all the other parts of the plan can stay on track. Those goals might include saving for your kids’ education and your retirement.
In many cases, a term life insurance policy does the trick. You buy as much as you need to replace your income from now until retirement and then let the policy expire when your major expenses are behind you. Your advisor can help you determine how much coverage you need.
For families with higher income, who may be assembling the pieces of a family life insurance plan and establishing a way to share the wealth with future generations, another option is a “cash-value life insurance policy.”
In the case of life insurance with a cash value, the payout is guaranteed because your coverage lasts your entire life (assuming you continue to make your payments). Your beneficiaries (i.e., the persons you choose to receive your life insurance payment in the event of your death) get the entire amount, tax-free.
What is cash-value life insurance?
A cash-value life insurance policy is one part guaranteed life insurance and one part investment component, called the cash value1, which provides you the opportunity to grow your money – and access it later. Together, the two halves of the policy play a critical role in helping you protect your assets, minimize taxes on the estate, and provide access to money while you’re still alive.
These policies are most commonly called universal life insurance or whole life insurance, like the kind offered by Serenia Life.
Here’s how it works
As long as you continue to make the required payments, your life insurance coverage is guaranteed to pay a tax-free death benefit to your beneficiaries. Throughout that time, a portion of each payment gets invested into the cash value, increasing your earnings over time. In the case of a participating whole life insurance policy, you get to participate in the financial success of your insurance provider through dividends2, which can be used to buy more coverage or it can be applied to your monthly premiums to save you money.
A word on dividends
The dividends that you receive within a participating whole life insurance policy are distributed at the discretion of your insurance provider. They generally reflect a cautious, long-term approach to investing that smooths out the highs and lows of the market. The investment objective favours safety over maximizing returns, so analyzing these dividends against market income funds may yield a fair comparison. You can learn more about how returns are determined and shared here. Or sit down with a Serenia Life advisor, to answer your questions.
By comparison, term life insurance is only in effect for the length of the policy, typically 10, 20, or 30 years. At the end of a term life insurance policy, you can let it expire or renew for another term. Learn all about it in our guide to term life insurance.
Advantages and disadvantages of cash-value life insurance
As you further your research into the best type of life insurance for your situation or prepare for a discussion with a Serenia Life advisor, here are some advantages and disadvantages to consider.
| Lifetime coverage As long as your payments continue to be made, the policy will never expire. | Higher cost Compared to term life insurance, cash-value policies cost more because they offer an investment component as well as a guaranteed payout. |
| Low-risk, long-term earning potential The cash portion of your policy grows tax-free* and can benefit from long-term growth as well as the compound effect. It’s a great option because it can be turned into cash if you were to need it in the future. *Taxes may apply upon policy loan or withdrawal | Conservative growth over the short term The investment portion of your policy is not recommended for short-term goals. It requires patience – and a few decades – to see significant growth. This is why purchasing a whole life policy for a baby or a child is such a smart investment. Time is on their side. |
| Access to cash You can dip into the available money in your policy’s cash portion to pay for emergencies or give your kids a leg up. | Complexity There are many rules that affect how and when you can access the cash in your policy reserve. Always get tax advice before making any withdrawals or loans. |
| Estate planning Because the death benefit is guaranteed, you can plan for the future with greater confidence. For example, knowing your kids will inherit money may allow you to save less or spend more in retirement. | Potential for a reduced payout If you take money out of the cash portion of your policy, it may reduce the amount of your death benefit. Always get advice on the best way to access your money. |
Factors to consider before choosing cash-value life insurance
Cash-value life insurance policies require a bigger commitment of your time and money. You need to explore your options, understand the rules, and be willing to pay more, compared to term life insurance. A Serenia Life advisor will help you decide whether this coverage is right for you by learning about your situation and assessing your needs. They’ll go over the following questions with you:
- Is a cash-value policy the right choice given your life stage and ability to make payments for the next two (or more) decades?
- Do you need financial tools to make transferring your wealth to the next generation or beyond easier and more cost-effective?
- How will life insurance complement the other parts of your financial plan and help you better manage financial risk? For example, will you accept greater risk in your investment portfolio, knowing that it’s offset with the security of a guaranteed death benefit?
The answers to questions like these can help your advisor better understand your needs and help you plan smarter for the future.
Is cash-value life insurance right for you?
Cash-value life insurance fits the financial plans of some families like a glove. Others feel better spending less on term life insurance and preparing for the future in other ways. Here’s a brief description of how two typical couples made up their minds with the help of their insurance advisors.
| The owners | The Professionals |
|---|---|
|
Linda and Dan are high-income earners with two children. They own a business so their finances are complicated and unpredictable. Whole life insurance is affordable for them, and it will provide a guaranteed, tax-free inheritance for their kids. They also like how it nicely complements their children’s RESPs.
The cash portion could be used to help with the cost of tuition or put towards something completely different – it’s really up to them. If the business is successful, and the kids achieve their own financial independence, the couple could donate the policy to a charity. |
Sheldon and Brenda both have good pension plans at work and expect their retirement to be well-funded. Their two kids will inherit the family home and whatever investments remain. The couple feels that’s enough.
For the time being, they are devoting any discretionary money to registered education savings plans and paying down their mortgage ahead of schedule. They both have enough term life insurance to pay off the mortgage if something happens to one of them between now and retirement. |
Both of these households have made wise decisions that will immediately kick in if one partner dies. And they both have long-term plans that put them on track to enjoy retirement. Your plan will be tailored to your unique situation.
Why choose Serenia Life for cash-value life insurance?
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 families, and their communities, including:
- $1,000 post-secondary scholarships
- $250 seed funding toward fundraising events
- Free digital wills (value: $189), or a $150 reimbursement when you pay for a lawyer to draft or update your will
View a full list of our member benefits.
Let us help
Life insurance with cash value is not for everyone. But for some, it’s a solid anchoring point in financial plan for the whole family because of the guaranteed payout and the ability to transfer wealth, tax-free, to loved ones. Get in touch with a Serenia Life advisor to review your needs.
Frequently Asked Questions
Is cash value of life insurance taxable in Canada?
Yes, if you decide to take out a loan or make a withdrawal on the guaranteed cash value of your life insurance policy, you will need to pay this back – with interest – and the amount may be taxable. However, if the amount you withdraw is less than what you’ve paid into the policy, you may not have to pay income tax.
If you decide to cancel your policy, the value is taxable only if it is more than what you’ve paid for your policy so far. In this case, the money you receive as the policyowner will be treated as taxable income, and includes any interest the cash value has earned or any dividends paid into it.
What happens if I cancel my policy?
In this scenario, you will no longer have life insurance coverage in the event of your death, potentially leaving your loved ones in a financially stressful situation when the time comes. Keep in mind that you will receive the cash value of your policy minus a “surrender fee,” taxes owed on any interest earned, and any unpaid premiums or outstanding loan balances, if any.
Can I switch from term life insurance to cash value life insurance?
Some life insurance providers let you convert a term policy to a cash value policy within a certain time frame, often without requiring additional health assessments. If you like the idea of not having to undergo further health exams, the Guaranteed Purchase Option (GPO), also known as the Guaranteed Insurability Option (GIO), is a feature (also called “rider”) in some life insurance policies that allows the policyholder to purchase additional coverage in the future without undergoing a medical exam or providing evidence of insurability.
What is a Dividend Scale Interest Rate (DSIR) and how does it relate to cash value?
The Dividend Scale Interest Rate (DSIR) is a rate that life insurance providers use to figure out how much they might pay you in dividends (the non-guaranteed portion of your total cash value) if you have a participating whole life insurance policy. It’s not the actual return you’re getting on your money, but it’s a key factor in calculating how much you could earn through dividends.
What is Serenia Life’s current Dividend Scale Interest Rate (DSIR)?
Serenia Life’s DSIR is the highest it’s been in many years at 6.2%. Learn more
What is 20-pay whole life insurance for children? Does it also have cash value?
20-pay whole life insurance is a popular option for children since it means parents can stop making payments after 20 years. Adults also have the option to purchase a 20-pay whole life for a slightly higher cost – but with an end in sight when it comes to payments. Similar to a whole life policy, 20-pay whole life insurance also comes with a cash value that can grow quite significantly over the long term with a coverage that lasts a lifetime.
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 cash value of the policy 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 the 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. They have the potential to increase the value of your policy above the guaranteed amount, depending on the dividend option selected.
