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With life insurance being a crucial part of an effective financial plan, considering the coverage offered by whole life insurance works best for most Canadians. The insurance policy provides financial protection to you and your loved ones for your lifetime provided the policy is kept active.
At the same time, it helps you create wealth that can be accessed when you need it during your lifetime. With every premium paid, the insurance company takes a certain percentage for investment. You can use the investment returns as cash value. The cash value can be used as additional finances to your retirement income or for any other needs you may have
Generally, whole life insurance guarantees tax-free death benefits to your named beneficiaries with the inclusion of a guaranteed saving component in form of cash value. Whole life insurance is the traditional form of permanent insurance, where the insurer takes on both the risk related to death and the underlying investment risk. Although it is the original life insurance policy, it does not equal permanent life insurance.
Unlike term life insurance policy, whole life insurance provides lifetime coverage, its premiums are constant throughout and the death benefits are guaranteed to be paid to your beneficiaries upon your death.
How does whole life insurance work?
When you decide on the right whole life insurance policy to purchase, you will need to keep your premiums updated. The amount of premiums is fixed and is based on the coverage amount which is determined by age, gender, lifestyle habits, profession, and financial goals.
The premiums can be paid off monthly, annually, or the entire amount upfront. Each premium paid is divided into life insurance death benefits accumulation and investments in form of cash value. Cash value is an investment component that allows interest to accumulate on a tax-deferred basis.
To increase cash value, the insured remits paid-up additions. The dividends acquired can be reinvested into the cash value to earn more interest. The cash value can be accessed through making a withdrawal that amounts to the total paid premiums or requesting a loan against it with interest’s varying per the policyholder. Loans that remain unpaid are deducted from the death benefits. It is important to know that withdrawals reduce the number of death benefits paid to the beneficiary upon your death.
Upon your death, your named beneficiaries receive the death benefits while the insurance company keeps the remaining cash value.