Understanding Life Insurance as an Investment: Ultimate Guide

Also known as participating permanent life insurance, these products feature lifetime insurance coverage in exchange for fixed monthly premiums. The premiums will remain the same even as you age, change occupations, or make other lifestyle changes.

The insurance company invests the cash value of the premiums, allowing it to compound over time and grow tax-free. If the investments grow well over time, you may receive dividends that you can reinvest.

You can also decide to withdraw money from the policy or use it as collateral for a third-party loan. However, such withdrawals can lead to tax liabilities.

Whole life insurance is a good choice if you want permanent coverage and favour passive investing. The policy will pay out death benefits if you die at any point, but you still have an investment that delivers tax-advantaged, stable growth.

Universal life insurance is very similar to whole life insurance. It’s permanent insurance, so you get lifetime coverage and tax-free growth.

You can also take loans against the cash value or withdraw money from the policy. The major difference is that you have more influence over how you can grow the policy’s cash value.

It’s a perfect choice for people who prefer a more hands-on approach to investing. You can choose how to invest the policy’s cash component depending on your objectives and risk tolerance. However, the growth of the policy’s cash value hinges on the performance of the investments you choose.

With universal life insurance, there’s some flexibility with the premiums. You can pay a fixed premium or vary the payments as you see fit. However, you must cover the insurance provider’s regular deductions.

Universal life insurance is cheaper than whole life insurance for various reasons. In whole life insurance, you’ll pay higher premiums for a guaranteed death benefit, cash value, and monthly premium.

With universal life insurance, you can reduce the premium payments and the policy’s death benefits depending on your situation. Universal life insurance is also less expensive because you’ll agree to take on more risk to generate cash value as the policyholder instead of enjoying stable growth.

The cost of your life insurance depends on factors such as age, gender, health status, and lifestyle. However, you can expect to pay 25-30% more on premiums if you choose a whole life insurance policy ahead of a universal life option worth the same amount.

Remember, you can reduce the premiums on your universal life policy even further if there is a change in your situation.

Whole life insurance is a popular option because of its consistency. The death benefits, premium rates, and cash value remain stable over the policy’s life.

However, if you favour flexibility, it’s best to choose universal life insurance.  

The policy allows you to choose how much money you can invest into the policy’s cash value component. You also have control over the investments, and you can choose the level of risk you’re willing to take to maximize your gains. You can also increase or reduce the death benefits as your needs change.

Whole life insurance policies grow at a predictable rate due to the fixed interest rate. You’ll enjoy guaranteed growth, but there is no potential for generating outsized market returns in a bullish market.

In a strong market, universal life insurance will deliver a higher rate of return over a time period—assuming you made good choices with your investment. Conversely, your returns can falter or even slip below the returns on a whole-life policy if the market enters a bearish period.

So, you must weigh the impact of poor market performance on your investment before looking at potential growth.  

Whole life cash value grows quickly in the early days of the policy before slowing down, because the portion of the premium that impacts the cash value tapers off over time. Universal life insurance will grow cash value faster if you pay standard premiums and pick good investment vehicles.

No policy is better than the other. The right policy depends on your needs. Whole life insurance is the better choice if you want stability with your investments. You should choose universal life insurance if you want more flexibility and greater control over your investment.

You can’t convert your whole life insurance policy to universal life insurance. Therefore, it’s important to weigh your options carefully before agreeing to sign up for a policy.

If you have dependents, a universal or whole life insurance policy can give you the peace of mind that comes with knowing they will receive a payout whether you die at 70 or 95. Term life options have a maximum 30-year window.

Whole or universal life insurance policies are good alternatives to tax-free investment vehicles such as Registered Retirement Savings Plans and Tax-Free Savings Accounts. The policy’s cash value will grow tax-free, and your beneficiaries will receive death benefits without deductions. Do keep in mind, while they are a tax-free investment, life insurance premiums are not tax-deductible.

Since these policies are tax-free products, they are a fantastic choice for estate planning. If you have many fixed or long-term assets, your beneficiaries can use the death benefit funds to pay any accrued estate taxes. There will be no need to sell off some of your assets to offset the tax bill.

Since you can withdraw funds or take a loan against the policy, your whole or universal life insurance can act as a source of emergency capital. You can dip into it if a sizable emergency expenditure arises.

If you no longer have dependents and don’t have sizable debts to pay off, life insurance may not be a great investment choice. The attractiveness of a life insurance policy — including those used as investments — lies in the death benefits. If you don’t have anyone that can benefit from the payout and don’t intend to donate to a charity, the policies lose their attractiveness.

Universal life insurance policies allow you to choose from different investment options, but independent investing is far more flexible. Exploring independent investments will give you more control over your portfolio. Also, since you won’t lose money to the insurance company’s deductions, independent investments often generate better returns overall.

Why pay premiums to an insurance provider when you can take advantage of Registered Retirement Savings Plans and Tax-Free Savings Accounts? These investment vehicles also allow you to grow your funds tax-free (to a level), and you can get them from almost any Canadian bank. Since you don’t need to pay premiums, your TFSA investment will yield better returns in the same market environment.