As a small business owner in Canada, you face a unique set of financial challenges. While you have the freedom to operate your business according to your vision and values, you are also responsible for your own retirement planning. You may be familiar with Registered Retirement Savings Plans (RRSPs), which are commonly recommended for retirement savings. However, whole life insurance is an often-overlooked alternative that may be a better fit for some small business owners. In this blog, we will explore why Canadian small business owners should consider whole life insurance as retirement income rather than RRSPs.

What is Whole Life Insurance?

Whole life insurance is a type of life insurance policy that provides coverage for the entirety of the policyholder’s life, as long as the premiums are paid. Unlike term life insurance, which provides coverage for a specific period of time, whole life insurance offers lifelong protection. It also includes a savings component, known as the cash value, which grows over time and can be accessed by the policyholder in various ways.

Whole life insurance policies are typically more expensive than term life insurance policies, as they provide lifelong coverage and a savings component. However, the higher premiums may be worth it for some small business owners, as we will explore in this blog.

What are RRSPs?

RRSPs are a popular retirement savings vehicle in Canada. They allow Canadians to contribute a certain amount of their income each year to a tax-sheltered account. The contributions reduce the contributor’s taxable income, and the funds in the account grow tax-free until they are withdrawn.

RRSPs are subject to contribution limits each year, which are based on the contributor’s income. The contribution limit for 2022 is 18% of the contributor’s income, up to a maximum of $29,210. Any contributions made in excess of the contribution limit are subject to a penalty tax.

When the contributor reaches retirement age, they can begin withdrawing funds from their RRSP. The withdrawals are subject to income tax, but the idea is that the contributor will be in a lower tax bracket in retirement than they were during their working years, so they will pay less tax on the withdrawals.

Why Small Business Owners Should Consider Whole Life Insurance

  1. Protection for Your Business

As a small business owner, your business is likely one of your most valuable assets. If something were to happen to you, such as a sudden illness or unexpected death, your business could suffer. Whole life insurance can provide protection for your business by providing funds to cover expenses such as:

  • Business debts
  • Payroll expenses
  • Taxes
  • Legal fees
  • Business succession planning

By having whole life insurance, you can help ensure that your business will continue to operate smoothly in the event of an unexpected loss.

  1. Guaranteed Cash Value Growth

One of the key benefits of whole life insurance is that it includes a savings component, known as the cash value. The cash value grows over time, based on the policy’s interest rate and the premiums paid. The growth is tax-deferred, meaning you won’t pay tax on it until you withdraw the funds.

Unlike other types of investments, such as stocks or mutual funds, the cash value in a whole life insurance policy is guaranteed to grow. This means you don’t have to worry about market fluctuations or economic downturns affecting the value of your investment.

  1. Tax-Free Access to Funds

When you withdraw funds from an RRSP, the withdrawals are subject to income tax. This means you may end up paying a significant amount of tax on your withdrawals, depending on your income in retirement.

In contrast, the cash value in a whole life insurance policy can be accessed tax-free through a policy loan or withdrawal. This means you can access your funds without worrying about the tax implications.


  1. Flexibility in Premium Payments

One advantage of whole life insurance is the flexibility it offers in premium payments. While term life insurance policies require you to pay a fixed premium for a set period of time, whole life insurance policies allow you to adjust your premium payments as your financial situation changes.

For example, if your business experiences a financial setback and you need to reduce your premium payments for a few years, you can do so without losing your coverage. Conversely, if your business experiences significant growth and you have more disposable income, you can increase your premium payments to build up your cash value more quickly.

  1. Estate Planning Benefits

Whole life insurance policies can also offer benefits for estate planning. When you pass away, your policy’s death benefit is paid out to your beneficiaries tax-free. This can help ensure that your loved ones are taken care of financially after you’re gone.

In addition, whole life insurance policies can be structured in a way that allows you to transfer your wealth to your heirs tax-free. For example, you can set up an irrevocable life insurance trust (ILIT) and transfer ownership of your policy to the trust. When you pass away, the policy’s death benefit is paid out to the trust, which then distributes the funds to your beneficiaries according to your wishes. Because the ILIT is a separate legal entity, the death benefit is not subject to probate or estate taxes.

  1. Protection Against Long-Term Care Costs

As you age, the risk of needing long-term care increases. Long-term care can be expensive, and it’s not covered by Canada’s public healthcare system. This means you’ll need to pay for it out of pocket or rely on your savings and investments to cover the costs.

Whole life insurance policies can offer protection against long-term care costs. Some policies include a long-term care rider, which allows you to access your policy’s death benefit to pay for long-term care expenses if you need them. This can provide peace of mind knowing that you’ll have a source of funds to cover these costs if they arise.

  1. Protection Against Disability

As a small business owner, your ability to earn a living is one of your most valuable assets. If you were to become disabled and unable to work, it could have a significant impact on your financial well-being. Disability insurance can help protect against this risk, but it can be expensive.

Some whole life insurance policies include a disability rider, which provides a monthly income if you become disabled and unable to work. This can be a cost-effective way to protect against the risk of disability, as the rider is typically less expensive than a standalone disability insurance policy.

  1. Guaranteed Insurability

One advantage of whole life insurance policies is that they include a feature known as guaranteed insurability. This means you can purchase additional coverage in the future without undergoing a medical exam or providing proof of insurability. This can be beneficial if your health changes in the future and you’re unable to qualify for traditional life insurance coverage.

  1. Control Over Your Legacy

With a whole life insurance policy, you have control over your legacy. You can name your beneficiaries and specify how you want the death benefit to be used. This can include providing for your loved ones, supporting charitable causes that are important to you, or leaving a legacy for future generations.

In contrast, when you contribute to an RRSP, you don’t have control over how the funds are used after you pass away. Your RRSP will be subject to estate taxes and probate, and your beneficiaries will need to pay tax on any withdrawals they make.


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