Funding Whole Life Insurance – And How to Compare the Equivalent Rate of Return | Life Insurance Questions Answered

Funding Whole Life Insurance – And How to Compare the Equivalent Rate of Return

When clients start exploring permanent life insurance—particularly Whole Life Insurance for estate planning—one question comes up often:

"This sounds too good to be true. Is it really?"

And honestly, that's a great question to ask. Because Whole Life insurance isn't a typical investment. It's a unique financial tool that can work exceptionally well when structured properly—and poorly when it's not.

In this post, I'll walk you through:

  • How funding a Whole Life policy works
  • Why the funding strategy matters as much as the policy itself
  • How to compare the Equivalent Rate of Return (ERR)
  • An example comparing two policy designs

Funding Whole Life Insurance – Why It Matters

Whole Life is often sold as "put money in, watch it grow tax-free, then pass it on tax-free." And while that's accurate at a high level, the how you fund it is just as important as the what you're funding.

Let's take a common scenario: a couple considering a Joint Last-to-Die (JLTD) Whole Life policy, paying $25,000 per year for 10 years.

One idea another advisor floated around was withdrawing funds from an RRSP to cover the premiums.

Pause. Big red flag.

Here's why:

  • RRSP withdrawals are fully taxable. Even if you're in a lower tax bracket today, you'll take an upfront tax hit and lose future tax-deferred growth.
  • Meanwhile, if you have non-registered investments, those are already being taxed annually. Redirecting part of that into a tax-sheltered Whole Life policy makes far more sense. It shifts money from being taxed every year to growing tax-free and paying out tax-free at death.

The key question becomes:

What's the purpose of your non-registered funds in a Whole Life Insurance plan?

If it's money earmarked for your children or long-term wealth transfer, then Whole Life could be the perfect fit.

Equivalent Rate of Return (ERR) – The Right Comparison

One of the biggest mistakes people make is comparing Whole Life to their stock portfolio. They'll look at early cash values and think:

"This is a terrible investment."

And honestly, they're right—if you compare it to equities.

But that's not the right comparison.

Whole Life is an estate tool. The proper question is:

"How much would I need to invest in a taxable account to match the same after-tax death benefit at life expectancy?"

This is called the Equivalent Rate of Return (ERR)—and it's often higher than what you'd earn in a taxable fixed income or GIC-style investment.

A few other advantages of Whole Life Insurance to consider:

  • Whole Life is vested. Once dividends are declared, they can't go down—even if markets crash.
  • It's not a replacement for your equity portfolio. It's more like a bond alternative or a tax-efficient fixed income strategy.
  • You can borrow against the policy during your lifetime, giving you liquidity without triggering tax (useful in market downturns).

But remember—the primary benefit isn't about accessing the cash. It's about the death benefit and how it offsets taxes like capital gains or RRSP taxes upon death.

Flexibility – Not All Policies Are Created Equal

When you commit to paying $25,000 a year for 10 years, that's a big financial commitment. Life happens—so flexibility matters.

Ask yourself:

  • If something happens to your income (disability, business downturn, health issues), can you pause or reduce contributions?
  • Does the policy allow you to increase contributions if you have a surplus in the future?
  • What happens if you want to surrender the policy early? How much do you get back?

Hint: Not all policies handle this the same way.

And yes—this is also where advisor compensation comes in. Some policies pay significantly higher commissions, but that often means less flexibility for you.

A good advisor should show you the options—including what they're paid.

Let's Look at an Example of Whole Life Insurance Funding

Here's a real-world comparison for a couple, both age 65, looking at a $25,000 per year strategy for 10 years.

Option 1 – Carrier A (10-Pay JLTD)

  • Premium: $25,000/year (mandatory for 10 years; no flexibility)
  • Starting Death Benefit: $641,718
  • Projected Death Benefit at Age 85: ~$2.5M
  • Projected Cash Value at Age 85: ~$2.0M
  • If surrendered after 10 years: ~$53,000 (after-tax)

Option 2 – Carrier B (JLTD with Deposit Option + Term Rider)

  • Coverage: $500,000 base + $500,000 Term Rider (this boosts your overfunding room)
  • Premium: $9,641 base + $15,358 planned deposits = $25,000/year (but flexible)
  • Funding: Can stop as early as year 5 if needed, or continue beyond 10 years if desired
  • Projected Death Benefit at Age 85: ~$2.65M
  • Projected Cash Value at Age 85: ~$2.3M
  • If surrendered after 10 years: ~$261,000 (after-tax)

Key Takeaways:

  • More flexibility. Carrier B allows scaling contributions up/down, pausing early, or extending funding longer.
  • Better liquidity. If your situation changes, the cash surrender value is significantly higher.
  • Lower commission. In this case, Carrier A pays almost double the commission to the advisor compared to Carrier B

Final Thoughts

Whole Life insurance can be an incredible estate tool—when structured properly. But it's not magic.

The real value lies in:

  • Structuring it the right way
  • Using the right money to fund it
  • Understanding that the goal is the after-tax death benefit, not the early cash value

This is why I always recommend getting a second opinion and benchmarking offers between multiple carriers.