Can You Get Money-Back Life Insurance in Canada?
Some countries allow insurance providers to offer money-back term life insurance policies. Sound too good to be true? You’re mostly right...
If you search online for money-back life insurance, you’ll likely get a lot of hits because some countries allow insurance providers to offer money-back term life insurance policies. What this means is they promise to give back the money you spent on coverage if you outlive the term of the policy.
Sound too good to be true? You’re mostly right.
There are no such term life insurance policies in Canada. Instead, there are ways to access the value of a permanent policy down the road. We’ll show you how it all works and why you should be suspicious of anyone offering you cash-back life insurance coverage in Canada.
One great exception to the rule
While you should always investigate promises of money-back life insurance, here’s something you don’t need to question: an optional Return of Premium rider that comes with many critical illness insurance policies in Canada.
One example is the recently introduced plan from Serenia Life, which gives you the option of paying more each month in exchange for being able to recover your payments if no claims were paid on your policy.
What is money-back life insurance?
In some countries, you can purchase term life insurance and add a rider (i.e., coverage that gets added on to an insurance policy to provide additional payouts under specific circumstances) that requires the insurance provider to return all or some of the cost if you outlive the life of your policy.
The catch is that the cost can be significantly higher, meaning you have less money to invest elsewhere. There can also be unexpected tax consequences when the money is returned because only the death benefit is tax-free.
Why money-back life insurance is not available in Canada
In Canada, the kinds of return-of-premium or money-back life insurance policies described above are generally not offered. According to Canadian insurers and financial advisors, while permanent life insurance can build cash value over time, the familiar “money-back at end of term” option available in other markets doesn’t exist in the same way here.
There are no public regulatory documents explicitly banning money-back life insurance policies, or explaining why they aren’t available here. One theory is that their absence helps to protect us all from things that may not be easy to understand, suggesting that their unavailability may stem more from commercial or structural factors than from regulatory restrictions.
Cash-value life insurance – the Canadian alternative
Many Canadians prefer to pay for life insurance while they need it and let it expire when it no longer makes sense, the same way a driver might let auto insurance expire when they sell their car. In this scenario, they purchase a term life insurance policy that stays in effect for a fixed length of time and then expires. At the end of the term, no money is returned to the policy owner. And that’s usually good news – because it means you’re alive, you’ve probably retired, and you no longer need to replace your income. In case you’re curious, here’s how to calculate how much life insurance you need.
For those who don’t like the idea of outliving their life insurance policy, there are many ways to personalize permanent life insurance that will stay in effect until you die at any age.
In every way, permanent life insurance is a more reliable and tax-effective way to protect your family because:
- The death benefit (i.e., a payment made to designated family members, other loved ones, or the charity of your choice after you die) is guaranteed. In a money-back scenario, there is no payout to your beneficiaries, and what you get back will likely be less than the eventual payout.
- The payout from a permanent life insurance policy is tax-free. Even if you could get the money you paid into your life insurance policy back, it would be added to your estate, and it could become taxable when your kids inherit it.
- Thanks to the cash value¹ portion of the policy, you can borrow² from your policy when you need access to tax-free emergency funds. Most of the time, there should be no incentive to surrender the policy. Discover all the advantages in our guide to cash-value insurance in Canada.
Here’s how it works
Whole life insurance provides coverage for life and never ends, as long as payments continue to be made. So even though you outlived your policy’s requirement for payments, you still have coverage. That’s a much better deal than losing coverage and having your money returned, even if it were possible in Canada (which it’s not).
For example, with 20-pay whole life insurance, you only need to make payments for 20 years, so there is an end in sight. Payments stop, and coverage continues. Plus, your insurance provider continues to contribute to the cash portion of your policy. This amount acts as a kind of “Plan B” that lets you borrow from your policy if you need money to handle an emergency or take advantage of an investment opportunity. The value of your cash portion continues to grow throughout the entire life of the policy.
If you choose the type of whole life insurance offered by Serenia Life, you also get the opportunity to participate in the company’s financial success. Each year, the insurer may declare dividends³, which are not guaranteed but have the potential to grow quite significantly over time. Once you receive them, you have the option to:
- Leave them to accumulate interest and grow in value
- Withdraw them as cash
- Use them to reduce your future payments
- Purchase Paid-Up Additions (PUA) — which are small, fully paid life insurance amounts that increase both the value of your total cash value and the payout received after your death
- If you choose to go the PUA route, you can take full advantage of the policy’s growth potential by investing in the Additional Deposit Option (ADO) and letting the interest compound.
As financial advisors will likely point out, this kind of dividend is valued by many investors for its consistency, resulting in lower risk. That’s what makes them different than traditional dividend investments that may advertise higher returns but are still exposed to ups and downs due to turbulent markets.
Whole life vs term life insurance in Canada
If the fear of outliving your life insurance policy has you worried, you can take heart in knowing that neither term life insurance nor whole life insurance poses any threat to your financial well-being if you live a long and healthy life. Here are two examples of people who were happy to outlive their policy payments and the impact it had on their finances.
Outliving term life insurance payments – Darryl’s story
Darryl took out a 20-year term life insurance policy when he was married and in his mid-thirties. He chose a term policy to cover his working years so that his wife could still afford to pay the mortgage in the event he died too soon. His logic was bang on. The policy was relatively inexpensive because he was young and a non-smoker. He chose an amount of coverage equal to 10 years of after-tax income so that his partner would be able to maintain a comfortable lifestyle if he died.
After 20 years, Darryl had outlived his life insurance policy. He joked that it expired before he did. He received no “money back” from the insurance provider, but he didn’t care. His mortgage was now paid off, he and his partner had put away significant savings, and they had much lower expenses heading into retirement.
Darryl has no regrets because, for the time he was insured, he had great peace of mind. He likens it to having home insurance: “You hope you never need it. But you don’t want to go without it.”
Outliving whole life insurance payments – The Walkers’ story
The Walkers purchased whole life insurance in their early 40s, as part of a complete family insurance plan. to preserve their wealth and pass it on to the next generation in the most tax-effective way. After making payments for 20 years, the life insurance policy became locked in for life. It could never expire, no more payments were required, and the tax-free payout was guaranteed for life. There is no reason to cancel this kind of policy because it’s paid in full.
In the rare case that they wanted to give up the guaranteed life insurance payout, they have an option that looks a bit like “money-back” option. It’s called the surrender value⁴, and it’s what they would receive if they cancelled their policy. But this would always be a last resort because this means they would no longer be leaving a legacy behind for their loved ones.
Luckily, they never cancelled. A few years after retirement, the youngest of their three adult children found her dream home, but didn’t have enough money to make the down payment. They decided to withdraw⁵ some of the cash value portion of their whole life insurance policy to help her out. After discussing their options, they all decide the best path to take is to not to pay the loan back*. This means the money borrowed from the policy won’t be added back to the death benefit. Instead, they will make sure the inheritance is adjusted in their will so each child still receives a fair share. Everyone wins!
*In this scenario, it is important to note that if the loan balance (including interest) grows to exceed the cash values, the policy could lapse and may result in taxes owed on the amount borrowed. Always make sure to do the math with your advisor beforehand so you can be sure you’re making the best decision for your loved ones.
Why choose Serenia Life for a whole life policy?
Our job is always to help you make informed decisions about the best way to protect yourself and your family. It’s why we warn you about life insurance offers that sound too good to be true, and why we take the time to match you with solutions that are always in your best interest. We can afford to be objective in our recommendations before we work for you, not shareholders or private owners.
As a member-based organization whose roots go back nearly 100 years, we encourage kindness by sharing our profits through community outreach, fundraising, and unique member benefits that help Canadians support their families and their communities, including:
- $1,000 post-secondary scholarships
- Up to $600 towards fundraising events and up to $400 to cover volunteering expenses in Canada
- Financial support for legal wills through a lawyer
- And much more!
View a full list of our member benefits
Know what’s right for you
We’re always here when you need advice. That includes any time you or a family member simply want to explore offers you read about or see online. Money-back promises are just one example of products that may tempt you with incentives that aren’t in the best interest of your financial plan. With us, advice is always free, honest, and unbiased because that’s what you deserve as a Serenia Life member. Set up an appointment today!
Disclaimers
¹Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the policy’s cash value will reduce the available cash surrender value and death benefit.
²Policy loan is an easy way to access the accumulated cash value of the policy. A variable interest is charged on the amount borrowed. This may result in taxable consequences. Loan can be repaid at any time. Upon death and the loan is unpaid, the outstanding balance including any accumulated interest will be deducted from the total death benefit, with the remainder paid tax free to the beneficiary(ies).
³Dividends are not guaranteed and are paid based on the overall experience of Serenia Life Financial, considering all risk factors. Dividends may be subject to taxation. Dividends will vary based on the actual investment returns in the participating account as well as mortality, expenses, taxes, lapses, withdrawals, and other experience of the participating block of policies. These factors have the potential to increase the value of your policy above the guaranteed amount, depending on the dividend option selected.
⁴Policy surrender can either be partial or full surrender of the cash value of the policy. A partial surrender will reduce the value of the policy. A full surrender means cancelling the policy and receiving the cash value less any surrender fees. Beneficiaries won’t receive any death benefit upon full surrender. There may be tax on the amount received that is above the adjusted cost basis.
⁵Policy withdrawal is an option to withdraw money from the accumulated cash value of the policy if Paid-up Additions or Accumulated Dividends is the selected dividend option. Withdrawals reduce the total cash value, affects future growth, and reduces the death benefit. If the withdrawal is only up to the amount that is paid in premiums (known as the adjusted cost basis), there won’t be taxes. Otherwise, there would be taxes on the portion that is more than the adjusted cost basis.
