How life insurance investment works in Canada in 2023

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Alexandre Desoutter updated on 1 December 2023

Although 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 products 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 investment: 5 Key takeaways

  1. Explore types like whole, universal, and variable life insurance for investment purposes.
  2. Conduct thorough research, considering wealth growth strategies for optimal utilization.
  3. Ideal for guarantees, cash value, and those seeking stability with low premiums.
  4. Understand that policyholders bear investment risks, emphasizing the need for professional consultation.
  5. Explore secure, tax-deferred options like RRSPs, TFSAs, and GICs for diverse investment strategies.

What is a life insurance investment?

The term “investment life insurance” generally refers to a type of life insurance policy that allows you to either accumulate cash in a specialized account or to allocate your premiums across different types of investments.  

Life insurance works as an investment when you purchase one of these specialized policies that include a savings element or a portfolio. The types of insurance usually associated with investing include whole life insurance, variable life insurance, and universal life insurance.

Beyond the death benefit included in all types of life insurance, buyers also gain a tangible asset with cash value that can be tapped into during their lifetimes.

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

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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 historys 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:

But, families with children aren't the only ones who may enjoy life insurance with an investment component.

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

Get 20+ quotes in seconds

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.

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.
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Alexandre Desoutter

Alexandre Desoutter has been working as editor-in-chief and head of press relations at HelloSafe since June 2020. A graduate of Sciences Po Grenoble, he worked as a journalist for several years in French media, and continues to collaborate as a as a contributor to several publications.

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