Our Top Tip for Saving Money: Forced Savings!
When it comes to quitting habits we don’t necessarily want to quit – cutting out chocolate, for example – sometimes it’s as simple as playing a trick on ourselves. We hide our temptation in the highest cupboard. Out of sight, out of mind, we tell ourselves.
Saving money is a goal we all share, but let’s face it — most of the advice out there is more of the same. But what if we told you there’s one strategy that flies under the radar but can transform your savings game? It’s not about skipping your morning take-out coffee or mastering extreme couponing. This tip for saving money is unexpected, underused, and incredibly effective over the long term.
With soaring prices and online retailers tempting us at all hours of the day, saving money can often feel like an impossible feat. And for many people, shopping is an activity that sparks joy – in the moment, anyway. If you’ve ever suffered from buyer’s remorse after a spontaneous purchase, you know what we’re talking about.
So when it comes to quitting habits we don’t necessarily want to quit – cutting out chocolate, for example – sometimes it’s as simple as playing a trick on ourselves. We hide our chocolates in the highest cupboard. Or, even better, we don’t buy them at all. Out of sight, out of mind, we tell ourselves.
Force yourself to save with forced savings
The same type of trickery could be useful when applied to saving money. In fact, there’s concept called forced savings that literally makes it impossible for us to access our hard-earned dollars if we find ourselves in the middle of a late-night Amazon shopping spree. Like the chocolates that are just out of our reach, our money becomes untouchable if we do things right.
So what is ‘forced savings’?
It’s the idea of putting your money into an account where you are unable to access it, no matter what. And while many of us place our money in a typical Savings account at the bank with the intention of leaving it there to grow, there are two problems with this scenario:
- Your money is still readily available; and
- The potential for long-term growth is peanuts.
With that in mind, it may be time to think outside of the bank!
For many Canadians, the idea of using a whole life insurance policy as a long-term investment is an alien concept. But in reality, it’s an incredibly efficient way to save and grow your money – and that’s in addition to its primary purpose (i.e., ensuring your loved ones are taken care of financially after you’re gone). How it differs from a long-term investment at the bank is as follows:
- It’s a safe, low-risk way to grow your money quite significantly over the long term.
- If you die, the money (any earnings + the coverage amount you signed up for) goes to your loved ones, tax-free.
How does forced savings work?
There are three pieces of a participating whole life policy that come together to create an ideal investment scenario for many Canadians, and we’re about to explain them to you – so read on!
1. Cash value¹
The cash value is a portion of a whole life insurance policy that is guaranteed to grow at a fixed interest rate each year until it is equal to the coverage amount of the policy, typically at age 100. Any earnings are tax-deferred while the funds remain inside the policy. That means no yearly T5 slips and no impact on the money you owe to the CRA!
2. Dividends²
Unlike the cash value portion of a whole life insurance policy, the earnings are based on the performance of the organization’s financials as well as a number of things outside of the organization’s control. For that reason, dividend earnings can go up or down each year. Any earnings are also tax-deferred.
3. Total cash value (cash value + dividends)
Think of your total cash value as the output of a nicely balanced portfolio. Your cash value is a safe investment that is guaranteed to grow slowly over time. While your dividends are higher risk, they can have a more significant financial impact over the long run.
Want to make your money grow more quickly? Here’s the secret.
In most cases, the cash value on a whole life insurance policy doesn’t begin to accrue for the first two to five years. Why? Because life insurers generally invest a portion of your payments into low risk-investments, where growth is initially slow. As you continue to make payments on your policy and earn more interest, the cash value continues to get bigger over the years.
That said, there is a secret to making your money grow more quickly within a participating whole life insurance policy: Paid-Up Additions (PUA). That’s right, with PUA, you can start earning money in your very first year.
What are Paid-Up Additions (PUA), and how do they work?
As a policyowner, you can use PUA to buy yourself an extra layer of coverage that is “paid up.” In other words, this extra insurance won’t cost you extra. Why? Because your dividends are paying for it. But the good news doesn’t end there. The financial benefit is three-fold:
- Your death benefit increases,
- Your payments will never go up, and
- The cash value increases considerably and at a faster rate.
Plus, you won’t have to undergo additional medical underwriting for your additional coverage!
Over time, the PUA will have a compound effect (i.e., you’ll be earning interest on your interest), which helps speeds up growth even more.
Accessing your earnings
When you do finally need the money, you can dip into your total cash value in one of three ways. Keep in mind that accessing the money can impact your policy, so always discuss your options with an advisor you trust before moving forward. We’ve listed the options and their impacts below (in order of smallest to greatest) for your consideration.
1. Dip into the cash value via a withdrawal³. Impact: Small.
This will reduce your death benefit by the amount you withdraw from the accumulated cash value in your policy. While this will impact your beneficiaries in the sense that they will not benefit from your policy’s growth, the initial coverage you signed up for is guaranteed. So it’s kind of win-win. You can benefit from the cash value while you’re living, and your loved ones will get the guaranteed death benefit when you’re gone. Also, if the amount you withdraw is less than what you’ve paid into the policy, you may not have to pay income tax. Another win!
2. Take out a loan⁴. Impact: Medium.
As with any loan, you will need to pay this back – unless you’re comfortable knowing the amount (plus interest) will be deducted from the death benefit your loved ones will receive. Another thing to keep in mind? If you haven’t paid the loan back, and the interest you’re accumulating is higher than the dividends you are earning, your policy could lapse. Remember, that interest has a snowball effect over time. If you do plan to pay the loan back, you can do so at your own pace and on your own time. But keep in mind, the quicker you pay off a loan, the less interest you will owe.
3. Cancel the policy. Impact: Large.
The technical name for this is a full surrender⁵. In this scenario, you will no longer have life insurance coverage in place in the event of your death, leaving your loved ones in a financially precarious situation when the time comes. Note that you may be charged a “surrender fee,” plus any unpaid premiums or outstanding loan balances, if any. Not to mention, if the amount you receive includes interest or investment gains, that portion will be taxed. (Note that you also have the option of a partial surrender⁵, which will reduce the value of the death benefit by the amount you’ve withdrawn.)
Ready to take that first step? Let us help.
Sometimes, the most impactful money-saving strategies aren’t the loudest or most obvious — they’re the ones quietly waiting to be discovered. By embracing this lesser-known tip for saving money, you’re not just cutting costs; you’re rethinking your approach to saving altogether. After all, every great savings journey begins with a single step, and this could be yours. Let’s book you in for a no-obligation call with our one of licensed advisors to learn more. Simply fill out the form below!
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.
²Dividends 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.
³Policy 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.
⁴Policy 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).
⁵Policy 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.