Whole life insurance in Canada is a type of permanent life insurance intended to provide life insurance coverage for your entire life. It’s characterized by two things; premiums that are expected to be level for life, and a cash surrender value if you cancel the policy before you pass.

 Whole life insurance can be characterised into two types – guaranteed and non-guaranteed.

 Guaranteed whole life insurance has premiums, coverage, and cash surrender values that are fully guaranteed for life.
Non-guaranteed whole life insurance generally has coverage and premiums that are not guaranteed (one example being a type of whole life insurance known as enhanced whole life). With non-guaranteed whole life insurance, investments internal to the company are produced by the policy each year. These investments are then used to reduce the premium, or lock in the permanent coverage. Because these investments are not guaranteed, any drop in the expected investments can lead to your premiums increasing or your coverage declining, and eventually, to your policy being cancelled. Therefore most Canadians should not consider a non-guaranteed whole life policy for their permanent life insurance needs.

Cash Surrender Values

 While often touted as an investment, cash surrender values in whole life are not. Instead, they are simply a return of overpayment of premiums (and taxed as such). With whole life insurance, companies invest your premiums early on in the policy with the intent of having your death benefit saved at about the time you’re expected to pass. When you pass, the life insurance company sort of says ‘we’ve been expecting this for 70 years, and have been saving for it. Your death benefit is sitting in the bank, here’s your payment.’.
Now, if you cancel your policy before you pass, that portion of the death benefit the company has been saving for is no longer needed – since they won’t be paying a death claim. The companies then return a portion of that savings towards your death benefit, and that return is called the cash surrender value. For most Canadians, you should ignore the cash surrender value when considering whole life insurance policies.  

Paid Up Additions

 With non-guaranteed whole life, the annual investment portion that;s paid out by the policy can be used for a variety of things. One of those choices is called Paid Up Additions (PUA’s). PUA’s are small slivers of completely paid up life insurance. Lets say your policy produces $100 in a year – that $100 can be used to automatically purchase maybe $300 of lifetime, single premium life insurance (in other words, your life insurance death benefit increases by $300).   

Uses of Whole Life Insurance

 For most Canadians, the appropriate use for whole life insurance is towards retirement age when you’re looking at life insurance for your estate and for final expenses. At that time, a comparison should be done between guaranteed whole life, and universal life insurance with Term to 100 cost of insurance.
The second use of whole life insurance is for life insurance for children. Because life insurance on children is generally inexpensive, a whole life policy can be an affordable way to lock in life insurance for your child’s entire life. A policy with Paid Up Additions can also help to increase the amount of coverage over your child’s lifetime, helping the coverage amount offset future inflation.