Participating Life Insurance – Everything You Must Know

What is participating life insurance?

Participating life insurance is a policy that pays dividends to a policyholder, allowing them to benefit from the profitability of an insurance company. Typically, a participating life insurance policy is a whole life insurance policy that comes with both an insurance component and cash accumulation component (unlike term life insurance that only has an insurance component). Whole life insurance provides life-long coverage as long as the insurance premiums are paid. Sometimes it is called a participating dividend-paying whole life insurance policy.

What is the difference between a participating and non-participating life insurance policy?

Non-participating whole life policies do not pay dividends to the policy owner, and the life insurance company determines the level premium, death benefits, and cash surrender value at the time of purchase. On the other hand, participating whole life insurance policies pay annual dividends and allow the insured to share in the profitability of the insurance company.

Participating whole life insurance is probably the best solution for people who want to have their cash values grow and compound tax deferred. However, debit and interest rates can fluctuate from year to year and there is no guarantee that the life insurance company will pay dividends.

It is important to note, though, that dividends have never failed to be credited to their policy owners for over 172 years in Canada and they continue to pay dividends even in today’s low interest rate environment. Annual dividends can be leveraged as paid up additions to accumulate additional cash values and/or to buy more death benefits. These actions help to maximize the efficiency of the policy. Other benefits include tax deferred growth without having the risk of loss in stock market volatility.

Non-participating life insurance premiums are typically lower than other whole life insurance solutions.

Participating life insurance pros and cons – what are they?

Participating life insurance has several benefits:

  • Additional stream of income through dividends paid by an insurance company
  • Very high flexibility
  • Ability to increase insurance face amounts through a purchase of paid up additions with dividends
  • The premiums on a participating whole life policy generally stay level for life

The main con, or downside, of participating life insurance is that it is more expensive than a non-participating policy.

In most cases though, participating life insurance turns out to offer better value in the long run.

Participating whole life insurance companies: are public or mutual companies a better choice?

Most life insurance companies in Canada today are stock companies (public companies), meaning that they are owned by shareholders who have voting rights and have input in how the company does its business. However, there are a couple of companies who also have a second block of business called a participating account, which benefits the policy owners who participate in this pool. Examples of public companies offering participating life insurance policies are Sun Life, and Canada Life.

Mutual companies are owned by the participating policy holders, not shareholders. Participating policy holders elect a board of directors and as a mutual company, they are not driven by shareholder pressures for quarterly results. Examples of mutual companies offering participating life insurance policies are The Equitable Life Insurance Company of Canada and Assumption Mutual Life Insurance Company.

What are the different dividend options on a participating whole life insurance policy?

There are several options that a person can elect with their dividends. These options include:

  1. Dividends paid in cash
  2. Premium reductions
  3. Accumulation of interest on the dividends
  4. Purchase of paid up additions

If the objective is to grow the cash value and death benefit inside the policy, then you would want to choose the paid-up addition option with the dividend.

The paid-up addition option is often the most popular because it allows the applicant to use the annual dividends to purchase additional permanent insurance, which is added to the policy’s initial death benefit. Over time, the initial insurance amount could double or even triple, depending on the company’s dividend rate. Once the face amount increases, it can never be decreased, regardless of changing market conditions. Not only will the insured be guaranteed the continuing growth of their insurance amount, but the guaranteed cash values also increase.

Is there advantage to taking out a participating whole life insurance policy when you are younger?

Most things have advantages when we do them when we are younger. Implementing a participating whole life insurance policy when you are younger provides less cost of insurance overall, and gives a person many more years to grow cash values. Additionally, if it is designed correctly to maximize cash values, this is an excellent vehicle to create your own pool of capital and lend money to yourself by using your capital as collateral. It is closely linked to the infinite banking concept, allowing you to be the banker in your life.

Are the death benefit and/or cash value taxable on a participating whole life insurance policy?

All death benefits from life insurance policies are tax free and have been since inception. As long as the cash value remains in the policy, it is tax-deferred, tax-advantaged, and when positioned correctly, can be accessed with no taxes payable.

More about the author

Glen and Margaret Zacher founded McGuire Financial and have developed a very unique approach to helping people find money that they are currently losing unknowingly and unnecessarily.

Glen has coached many of the top advisors in Canada, giving them the necessary tools to succeed in their careers.

He is a Certified Financial Planner (since 2000) and has received high honours from Canada’s top investment & insurance companies. He is also rated in the Top Three Best Financial Services in Edmonton.

The book “The Bankers’ Secret,” co-authored by Glen Zacher and Jayson Lowe, provides financial tips and strategies for retirement planning, recapturing the interest on big loans, and becoming your own banker.