I’m one of the weird Mustachians that has a whole life policy rather than term life (I also have term life from work).
We have whole/universal life policies. My understanding is that it’s a tool for the wealthy to transfer wealth while avoiding major taxes.
In Canada, when a person passes away, the estate has to pay three types of tax.
1. Deemed disposition tax: Assets are treated as "sold" at death, triggering capital gains tax
2. RRSP/RRIF tax: Full value of registered accounts becomes taxable income
3. Provincial estate administration tax: Varies by province (e.g., 1.5% in Ontario above $50,000)
Insurance proceeds aren’t included and aren’t considered taxable income for the beneficiary.
The other benefit is that you can eventually stop paying the premium and still keep the policy because the investment portion of it generates enough income to cover the premium. One of my policies is like that. It’s a small one that my parents bought for me when I was a kid. The premium’s like, $8/month or something like that. The policy pays for itself and I don’t have to pay a premium anymore.
My husband has a $500k 20-pay universal life policy. After 20 years (I think we are on year 15 or something like that), the investments will generate enough to cover the premium for the rest of his life. This makes sense for us because we are high income now but are FIRE-ing soon, so premiums will end around the time we FIRE and become “low income”.
A small whole life policy is also a good way to pay funeral expenses, since insurance companies typically disburse the money more quickly than the estate if the funds are tied up in probate.
I would never consider borrowing against the policy even though I know it’s possible; I don’t know much about the costs of borrowing against your policy. There are also other additions and riders and options you can select to tailor your policy to your needs.
Term policies are much cheaper, so if you’re ONLY looking for a safeguard against something happening to you and providing for your family, term’s probably more appropriate.
Whole life policies are considered an investment (albeit a potentially poor one), whereas term policies are considered an expenses. Some people say that it’s a poor investment with a poor return, but I think of it this way. My husband’s policy costs $200/month for 20 years. That’s a $48k principal investment that will generate a guaranteed tax-free $500k return for DD/myself. Sounds pretty good to me.
Using a compound interest calculator, if I invested $200 monthly for 20 years, it would be worth $104,185 after 20 years. Assuming DH lives another 40 years until age 90, that $104,185 would be worth almost $1.5M. So his policy doesn’t generate great returns if he lives until 90. But if he only lives until 80, then it’s probably worth it when you factor in estate taxes. Also, the policy provides protection if he dies earlier. So there’s a trade-off.
I’m in Canada though and am by no means an insurance professional, so don’t quote me on this. I only know what I’ve been told.
