If you're looking for a life insurance policy that also offers some investment options, you may want to consider a participating life insurance policy.
With this type of policy, part of your premium goes into a mutual fund, and you can earn dividends on that money. This can be a great way to save for retirement or other long-term goals.
Participation in the policy can also help reduce your taxes. Keep in mind, though, that dividends are not guaranteed, and the value of the mutual fund could go down.
Keep reading to see whether or not a participating life insurance policy is right for you.
- Participating life insurance allows you to share in the surplus earnings of your insurer and earn dividends whenever the insurer makes an excess profit.
- With this type of insurance, there are different ways you can receive dividends.
- A participating whole life policy costs more than a comparable non-participating policy. And compared to term life insurance, participating life insurance is significantly more expensive.
What is participating life insurance?
Wouldn’t it be nice if you could share the profits of your insurance company? Well, a participating life insurance policy gives you a chance to do just that.
Participating life insurance lets you take part in the surplus earnings of your insurer and earn dividends whenever the insurer makes an excess profit. All policies are a type of whole life insurance, meaning they provide lifelong coverage and build guaranteed cash value.
With this type of insurance, there are different ways you can receive dividends. Either as monthly payouts or you can use the dividends to reduce the dollar amount of your future premium payments. This type of insurance also allows you to reinvest your dividends with the company and continue earning additional interest.
Participating life insurance is a less common form of life insurance so, it is recommended to speak with a professional before purchasing a policy.
Participating vs. non-participating whole life insurance
Non-participating whole life insurance does not include the same opportunities and ownership rights to participate in company profits, meaning you won’t earn any dividends.
Non-participating whole life insurance is suitable for estate planning purposes. You might also want to consider it if you are looking for a policy to cover funeral or burial costs.
The dividends aren’t usually guaranteed. Instead, they depend on the financial performance of your company.
The policy dividends are a return on your premium. As such, they are generally not taxable. For this reason, these policies are a great option for people who want to accumulate cash value.
What dividends options are available?
Depending on your contract details, you may have a few options on how you can receive the dividends. The most common options for a life insurance dividend payment are:
- Premium deductions
You can use this option to reduce the dollar amount of your premiums. Let's say the annual premium you pay is $600. And your policy earns $200 in dividends in one year. So in this case, the insurer will charge you only $400.
- Buy paid-up additional insurance
You can use this option to buy additional permanent life insurance without a medical test. Paid-up additional insurance accumulates cash value on a tax-advantaged basis. It is also eligible for dividends.
Most people use policy dividends to buy additional insurance. Over time, the initial policy amount can double or even triple. Once the face amount increases, the insurer can’t reduce it. A higher face amount means you’ll accumulate more cash value because the cash value will continue to grow at a guaranteed rate.
- Cash payment
If you take this route, the insurer will send you a check for the annual dividend amount.
- Pay off a policy loan
You can use the policy dividends toward repaying an outstanding loan taken out against your policy.
- Insurer savings account
This payment option allows you to earn interest on your dividends. The insurer will keep your dividend payments in a savings account and reinvest them. Your dividends will grow at a rate specified by the insurer. You are free to withdraw your dividends at any time.
Participating life Insurance: Public vs. Mutual?
All insurance companies have the same basic function—to sell insurance products to consumers. However, some operate as stock insurance companies, others as mutual insurance companies.
The key difference between the two is in the ownership structure. A stock insurance company is owned by its shareholders. However, a mutual company is exclusively owned by its policyholders. A mutual company exists for the sole purpose of providing insurance coverage to its members. In contrast, the main objective of a stock company is to make a profit for its shareholders.
In Canada, the majority of insurance providers are stock companies. However, some of them, such as Canada Life and Sun Life, also offer participating life insurance products.
Assumption Life is one of the most popular mutual companies in Canada. Another well-known name in this niche is Equitable Life Insurance Company of Canada.
Is it better to get a participating whole life insurance policy when you are younger?
It pays off to buy participating whole life insurance when you are younger. All else being equal, someone in their 20s pays much less for coverage than a 40-year-old. Buying a policy early also means you’ll have many more years to grow cash value.
Cash value refers to the portion of your participating whole life policy that grows at a rate guaranteed by the insurer. You can use this money to pay for future life events like a home purchase, a wedding, or children’s schooling.
And the best part? This money grows on a tax-deferred basis. You generally don't have to pay tax on withdrawals.
There are many advantages to participating whole life insurance.
- Create an additional stream of income
A participating whole life insurance policy allows you to create an extra source of income. These policies pay annual dividends whenever the insurer does well financially. While policy dividends are not guaranteed, some companies have paid them almost every year.
- Increase the policy’s face amount
You can use your annual dividend payments to buy paid-up additional life insurance. This is a great way to accumulate more cash value and increase the death benefit.
It is more flexible than whole life. It allows you to increase the death benefit without having to go through the underwriting process.
- Level premiums
Your participating life insurance premium stays the same as long as you live.
- Accumulates cash value
Participating life insurance policies include a savings component, called cash value. Funds in this participating account grow on a tax-deferred basis. You can withdraw from or borrow against your policy’s cash value at any time and use the money for any purpose.
Participating whole life insurance has certain drawbacks such as:
- It can be pricey
A participating whole life policy costs more than a comparable non-participating policy. And compared to term life insurance, participating life insurance is significantly more expensive. Expect to pay anywhere five to 15 times more.
- Dividends are guaranteed
The rate of return on a policy fluctuates. It depends on the insurer’s performance. When the company does well, you are likely to receive an annual dividend. When it doesn’t, you probably won’t earn any dividend.
Consider participating life insurance if you want the opportunity to earn annual dividends. It is also a good option if you want the flexibility to increase the death benefit. We can help you find the best possible participating life insurance policy that is tailored to your needs.
How does the policyholder receive dividends?
The policyholder receives dividends by having them paid out in cash, using them to reduce future premiums, or having them paid out in kind (in the form of additional policy coverage). Dividends are typically paid out once a year, but some companies offer more frequent payouts.