As discussed in our previous blog on Whole Life policies, participating whole life policies are those that participate in the insurance company’s investment earnings. These policies not only provide lifelong protection but can also generate dividends that grow your coverage or reduce your costs over time.
How does a participating whole life policy work?
When you purchase a participating policy, your premiums are put in a participating account.
- Think of it as a financial account that holds your premiums
- This account pays the insurance benefits, insurance company expenses and maintains a surplus reserve
- The rest of the money held in this account is invested, to generate earnings
- If those investments perform well, the earnings are shared with the policy holders as dividends
How are my insurance dividends determined?
Dividends are based on a dividend scale published by the insurer, which reflects factors like investment returns, claims experience, and operating costs.
Insurers publish the dividend scale annually and announce any updates to existing dividend rates. Although dividends are not guaranteed, Canadian insurers have an excellent track record of paying and even increasing dividends consistently.
Tip: Before buying or adjusting your policy, reviewing an insurer’s historic dividend scale can give you a good sense of performance stability.
What are my dividend options?
Policyholders can usually choose how their whole life dividends are used. The most common options are:
1. Paid in cash
2. Premium reduction
3. On deposit
4. Paid-up additions (PUAs)
5. Enhanced protection (lifetime enhancement guarantee)
Dividend options and impact on your policy
- Paid in cash – You may elect to take the policy dividends in cash. This will have no impact on your policy cash values or death benefit but dividends received in cash may be taxable.
- Premium reduction – You can use your dividends to pay your policy premiums. If dividends are low and only partially offset your annual premium, you will still have to pay the remaining premiums. If the dividends are in excess of your premiums, you will receive the excess premiums in cash and may be taxable.
- On deposit – You can leave your dividends with the insurer, to earn interest as if they are held in a savings account. The interest rate is comparable to other savings accounts available with banks. You can withdraw the dividends and the earned interest anytime however both the deposits and interest may be taxable.
- Paid-up additions (PUAs) – This option lets you use the dividends to buy additional permanent insurance. You do not need to pay any premiums for the additional insurance, it is ‘paid up’ using the dividends. This is a great way to increase both, your permanent coverage, and your cash values, without paying more for it. The paid-up additions also earn dividends.
- Enhanced protection – This hybrid approach uses dividends to buy one-year term insurance to enhance coverage now, and paid-up additions for permanent protection later.
- The dividends are first used to buy the one-year term coverage enhancements
- If there is excess money, it is used to buy paid-up additions (described above)
- Over time, as more dividends accumulate, your PUAs replace the term coverage
- This increases your permanent insurance and cash value at no additional premium cost
Participating policies are a good way to make some earnings from the insurance company. For most long-term planners, PUAs or enhanced protection options offer the best balance between growth and stability. They increase permanent coverage as you age and help offset future costs for estate transfer or final expenses, while benefiting from compound dividend growth.
If you hold a participating whole life policy, your dividends represent an opportunity, not just a payout.
Not sure which dividend option fits your plan best?
Let’s connect and review your policy together! I can help you choose a dividend strategy tailored to your needs and long-term objectives.
