Is Life Insurance a Good Investment? Explained with Examples
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Discover the methodologyAlthough not explicitly a financial product, life insurance can significantly contribute to planning for your later years and be a valuable and crucial investment.
So how does life insurance investment work? Which life insurance types have investment components? How do you choose the best option? We explain all you need to know in this guide.
You can also use our free comparator to explore life insurance investment options available in Canada from the best providers, get personalized quotes, and find a plan that truly benefits you.
Life insurance as an investment: 5 Key Points
- Explore types like whole, universal, and variable life insurance for investment purposes.
- Conduct thorough research, considering wealth growth strategies for optimal utilization.
- Ideal for guarantees, cash value, and those seeking stability with low premiums.
- Understand that policyholders bear investment risks, emphasizing the need for professional consultation.
- Explore secure, tax-deferred options like RRSPs, TFSAs, and GICs for diverse investment strategies.
How does life insurance work as an investment?
There are two types of life insurance: term and permanent. While both provide a death benefit for your loved ones, only permanent life insurance (like whole life or universal life) has the potential to grow a cash value.
Here’s how permanent life insurance works as an investment:
- Premium Payments:
- A portion of your premium pays for the life insurance coverage.
- The remaining amount is added to a cash value account, which grows over time.
- Cash Value Growth:
- Whole Life Insurance: The cash value grows steadily with guaranteed interest.
- Universal Life Insurance: Growth depends on investment options tied to the policy, offering the potential for higher returns.
- How to Use the Cash Value:
- Withdraw: Access the money to pay for retirement, emergencies, or large purchases.
- Borrow: Take a policy loan, often with lower interest rates than traditional lenders.
- Pay Premiums: Use the accumulated cash value to cover future premium payments.
Example of Life Insurance Investment
Let’s say you purchase a whole life policy with a $500,000 death benefit. Over 20 years, the policy builds $80,000 in cash value. Here’s what you can do:
- Withdraw $20,000 to help fund your child’s university education.
- Use $10,000 from the cash value to pay your premiums for a few years.
- Let the remaining $50,000 grow further while keeping your $500,000 death benefit intact.
Who is permanent life insurance as an investment best for?
Permanent life insurance combines lifelong protection with a built-in savings tool. While it may not provide the high returns of traditional investments, its tax advantages, low risk, and flexibility make it an excellent choice for those focused on long-term financial security and estate planning.
Before we go into the details, you can use our comparator below to explore the various life insurance investment options available based on your unique profile and needs and get personalized quotes in seconds.
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Which insurance combines life insurance with an investment account?
While many consumers prefer the lower monthly premiums of term life insurance, those who intend to use a life insurance policy as an investment vehicle will want to consider one of the following alternatives:
- Whole life insurance: This is a type of permanent life insurance that includes an investment component called "cash value." As you pay premiums, a portion of your payments goes into the cash value account, which grows over time. You can borrow against the cash value or withdraw it for various purposes, such as paying for education or supplementing retirement income.
- Universal life insurance: This is a type of flexible permanent life insurance that combines protection with the ability to build cash value. You can adjust your premiums and the amount of coverage you have, and any excess premiums are credited to your policy's cash value account, which earns interest.
- Variable life insurance: This is another type of permanent life insurance that allows you to choose how to allocate your premiums among a range of investment options, such as stocks, bonds, and money market funds. The value of your policy and the amount of death benefit it provides depend on the performance of the investments you choose.
How to use life insurance as an investment?
Life insurance as an investment works best for individuals who have already made the maximum contributions towards their Registered Retirement Savings Plans (RRSPs) or Tax-free Savings Accounts (TFSAs) and want to continue to grow their wealth.
If you’re in your mid-40s, for example, and your children are all financially self-sufficient, you might use life insurance to protect their inheritance, rather than provide for their basic needs.
A whole life insurance policy with an investment component not only guarantees a cash payout for your children when you pass but also includes the funds needs to cover any taxes they might accrue as a result.
How do you buy life insurance with investments?
It’s important to remember that life insurance exists, first and foremost, to protect your loved ones from financial hardship after your passing. A policy that includes an investment component can play an important role in growing your wealth, but should not form the primary basis of your savings for retirement or your estate.
To buy a life insurance policy with an investment component start by comparing your options. It’s easy to do right here using our comparator below.
Compare the best life insurance companies
When purchasing life insurance research multiple life insurance companies and consider speaking with a life insurance broker to find the best options for you.
Factors like your age, sex, occupation, and personal and family medical history affect your premiums. Smokers, heavy drinkers and those who are overweight can save by making lifestyle changes before purchasing a plan.
Remember, buying life insurance is an important decision with long-term financial implications for you and your family. Take the time to weigh your options until you find a policy that meets your family’s needs.
Is whole life insurance a good or bad investment?
Whether it makes good financial sense to purchase life insurance as an investment vehicle will depend on your particular circumstances. Those with a high net worth, for example, may benefit from a life insurance policy with a cash value sufficient to cover any tax their heirs might pay.
For a person without retirement savings, on the other hand, the money spent on higher premiums for a whole or variable life insurance policy might be better allocated to a managed portfolio.
When is whole life insurance a good investment?
Whole life insurance may be a good investment for you and your family if:
- You want the peace of mind of a guaranteed death benefit. Whole life insurance provides guaranteed death benefits, which means that as long as you pay your premiums, your life insurance beneficiary will receive the full death benefit upon your death.
- You want to build cash value. The cash value component of whole life insurance and variable life insurance grows over time, which means you can use it as a long-term savings or investment vehicle. You can borrow against the cash value or withdraw it for various purposes, such as paying for education or supplementing retirement income.
- You want to lock in low premiums. Whole life insurance premiums are fixed, which means that once you pay a premium, it won't increase. This can be a good option for individuals who want to lock in their premiums for the long term.
When is whole life insurance a bad investment?
Whole life insurance may not be the best choice for you and your dependents if:
- You need flexibility. Because whole life insurance premiums don’t change once you’ve purchased the policy, you won’t be able to adjust your monthly payments if circumstances change. If you’re just starting your career, or anticipate a career transition at some point, term life insurance may be the better choice.
- You want a high rate of return. Whole life insurance isn’t typically considered a high-return investment, and the cash value component may not grow as quickly as other investment options, such as stocks or mutual funds.
- You have a limited budget. The premiums for whole life insurance generally exceed those of other insurance products, and penalties for missed payments can be strict. Repeated failure to pay may lead the insurer to cancel the policy, leaving you without protection or the value of the investment.
Is cash value life insurance a good investment?
Cash value life insurance can be a good investment for those seeking both insurance coverage and a savings component. The policy accumulates cash value over time, which can be accessed through withdrawals or loans for various financial needs.
Additionally, the cash value growth is tax-deferred, providing potential tax advantages. However, the premiums for cash-value life insurance are typically higher than those for term life insurance, and the returns on the cash value may not match the potential gains from other investment options.
Individuals should carefully assess their financial goals, risk tolerance, and overall financial situation before opting for cash-value life insurance as an investment. Consulting with a financial advisor is advisable to make informed decisions based on individual circumstances.
How is permanent life insurance vs long-term investments?
Both permanent life insurance and long-term investments have their own unique features and potential benefits. The best choice for you will depend on your specific financial goals and circumstances, and it's important to consider both your short-term and long-term financial needs when making investment decisions.
Long-term investments like stocks, bonds, and mutual funds are designed to grow over a period of time. These products typically yield higher returns than other investment options. Proceeds from successful investments can also be used to fund a variety of financial goals. From college tuition to retirement to a new kitchen, dividends have almost unlimited utility.
Permanent life insurance, such as whole life or universal life, provides a death benefit to your beneficiaries in the event of your passing and may also include an investment component, such as a cash value account. This can be a useful tool to help provide financial security for your loved ones and potentially meet long-term financial goals, such as paying for your children's education or supplementing your retirement income.
Who is life insurance a good investment for?
While almost anyone will benefit from the peace of mind associated with a life insurance policy, life insurance as an investment may be particularly useful for people with young children or who want to supplement their retirement income without incurring an additional tax burden.
Let's explore a couple of examples:
For example
Elise and Parker are in their late 20s and have three young children. To maximize the value of their life insurance policies, the couple opts to purchase whole life plans. If necessary, they can use a portion of the investment portfolio to top up college funds or to ensure that the children receive a small inheritance once they pass.
But, families with children aren't the only ones who may enjoy life insurance with an investment component.
For example
Marcus is in his mid-30s and diligently deposits a portion of each paycheck into his Tax-free Savings Account (TFSA) each month. While he knows he’s on track for retirement, he’d like to build additional wealth to support his lifestyle. A whole life insurance policy with an investment option helps Marcus to “top up” his other savings.
Want to check if life insurance is a good investment for you? You can do it right here using our comparator below. Compare multiple options and get personalized results in seconds.
Compare the best life insurance companies
Who bears the investment risk in variable life insurance products?
With variable life insurance, the policyholder bears the investment risk. This means that the policyholder is responsible for choosing how to allocate their premiums among a range of investment options, such as stocks, bonds, and money market funds. The value of the policy and the amount of death benefit it provides depend on the performance of the investments the policyholder chooses.
If the investments chosen by the policyholder perform poorly, the value of the policy may decrease and the death benefit may be reduced. On the other hand, if the investments perform well, the value of the policy may increase and the death benefit may increase as well.
It's important to note that variable life insurance is a complex financial product and not suitable for all investors. Before purchasing, consider whether this type of policy is appropriate for you based on your financial goals, risk tolerance, and overall financial situation.
Expert advice
It's a good idea to consult with a financial professional or broker to help you understand the risks and potential benefits when deciding whether a variable life insurance policy is a good investment.
Life Insurance vs. Traditional Investments
When planning your financial future, it’s important to understand how life insurance compares to traditional investments like RRSPs, TFSAs, or mutual funds. As we've said, life insurance, particularly permanent policies, offers unique benefits like tax-deferred growth and a guaranteed death benefit. On the other hand, traditional investments are designed primarily for wealth accumulation and may offer higher returns. The table below highlights the key differences to help you decide which option suits your goals.
| Feature | Life Insurance | Traditional Investments (RRSPs, TFSAs, ETFs, etc.) |
|---|---|---|
| Primary Purpose | Protection and financial security for loved ones | Wealth building and maximizing returns |
| Returns | Moderate; based on cash value growth and dividends | Higher; dependent on market performance and investment choices |
| Tax Benefits | Tax-deferred cash value growth and tax-free payout | Tax advantages depend on the account (e.g., RRSPs or TFSAs) |
| Liquidity | Accessible through loans or withdrawals (may reduce death benefit) | Highly liquid; funds can be withdrawn anytime (with potential penalties in RRSPs) |
| Fees and Costs | Higher premiums due to insurance and savings components | Lower costs; fees depend on investment types and platforms |
| Flexibility | Limited; policy terms and cash value access restrictions | High; flexible allocation across diverse assets |
| Time Horizon | Long-term; best for lifelong or estate planning | Suitable for short, medium, or long-term goals |
| Risk | Low; guaranteed growth in some policies (e.g., whole life) | Medium to high; depends on the investment type and market volatility |
| Ideal For | High-income earners, estate planners, legacy building | Anyone looking to grow wealth, save for retirement, or meet specific goals |
What alternative investments are there to life insurance?
If using life insurance as an investment vehicle doesn’t match your savings strategy, don’t worry. Canadians have access to numerous secure and tax-deferred investment options to prepare for later-life living expenses.
- Guaranteed Investment Certificates. Available through banks and other financial institutions, this investment vehicle offers a guaranteed rate of return over a specified term. A five-year GIC with a 2% rate of return, for example, will generate 2% interest on the investment for a period of five years.
- Registered Retirement Savings Plans. One of the most popular ways for Canadians to prepare for retirement, RRSPs allow tax-deferred savings up to an annual contribution limit set by the government. Contributions to an RRSP are tax-deductible, and you’ll pay a reduced income tax rate on your eventual withdrawals.
- Tax-Free Savings Accounts. Similar to an RRSP, a TFSA helps you grow your wealth in preparation for retirement by lightening your tax burden. While you can’t deduct contributions to a TFSA on your annual income tax return, you won’t pay capital gains taxes as the account grows, nor income taxes on withdrawals.
FAQs on Life Insurance as an Investment in Canada
Life insurance can be a good investment for those seeking lifelong coverage and financial tools like cash value accumulation. Policies such as whole or universal life insurance offer tax-deferred growth and a guaranteed death benefit, but they are more expensive than traditional investment options like RRSPs or TFSAs. It’s best suited for long-term planning rather than high returns.
Life insurance is not an ideal investment for maximizing returns because its primary purpose is protection, not growth. The fees and premiums are higher than traditional investment options, and the returns on the cash value are typically lower than what you might earn through mutual funds, stocks, or ETFs. It's better suited as part of a comprehensive financial plan than a standalone investment.
You can "make money" from life insurance through the cash value component in permanent policies like whole or universal life insurance. The cash value grows tax-deferred and can be accessed through loans or withdrawals. Additionally, participating policies may pay dividends, providing further financial benefits while maintaining coverage.
Life insurance is a good investment for high-income earners or individuals with long-term financial goals, such as estate planning, leaving a legacy, or covering future tax liabilities. It’s particularly beneficial for those who have maxed out their other tax-advantaged investment accounts like RRSPs and TFSAs and want an additional tool for wealth preservation.
