Participating Life Insurance provides both lifelong insurance protection and the opportunity to grow your wealth tax-free. It is the best of both worlds.

A participating whole life insurance policy provides tax-deferred growth while you are alive and a lump-sum payment to your named beneficiaries after your passing. It provides both lifelong insurance protection and the opportunity to grow your wealth tax-free, which is the best of both worlds. 

In this article, Best Insurance Online has gathered information about what participating life insurance is, who it is suitable for, and the numerous benefits offered to policy owners. Read on to find out with us! 

What is participating life insurance? 

Participating Life Insurance is a permanent or whole life insurance that comes with two components: insurance and cash accumulation, unlike term life insurance policies that solely provide the former component. 

It pays dividends to the policyholder, allowing them to “participate” in the insurance company’s profits. The insurance company assesses its profit with the participating investment fund’s actual claims and expenses, then distributes the profits to the policy owner on an annual basis. Even though these payments are not guaranteed, almost no insurers skip a year’s distribution. 

Participating Life Insurance also offers guaranteed lifetime coverage if the policy premiums are paid on time. Premiums remain unchanged throughout the paying period, so your insurance cost will not rise even if you reach old age or experience additional health issues. 

Beyond the insurance protection, this type of policy has a tax-advantaged investment component that can build a much larger estate than in a traditionally taxable policy. The accumulated cash value in your policy grows without yearly taxation.

Note that participating life insurance is also sometimes referred to as a participating dividend-paying whole life insurance policy.

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What are the benefits of participating life insurance? 

Besides those mentioned above, participating life insurance has multiple advantages: 

Death benefit

Named beneficiaries receive the death benefit and any paid-up additions tax-free, thereby reinforcing your assets.

Annual vesting 

When dividends are used to purchase additional paid-up insurance, they form a new accumulated cash value “floor” that is guaranteed and cannot be decreased, unless permitted by you – the policyholder.

Account growth 

Guaranteed cash values and policy dividends are always tax-free or tax-advantaged on the growth during your lifetime. As a result, you can meet your long-term financial goals and transfer assets directly to the named beneficiaries.

Cash access

You can get access to the accumulated cash value of your policy at any time in three ways: policy loans, cash value withdrawals or by pledging the cumulative cash value as collateral for a tax-advantaged line of credit. All of these options offer additional liquidity and flexibility.

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Who should consider participating life insurance policies? 

This type of policy can build cash value thanks to dividends, and it is an excellent solution for those who are:

  • Seeking lifetime insurance protection while making considerable savings; 
  • Wishing to raise their death benefits overtime to catch up with inflation;
  • Keen on accessing the cash value that is useful for: 
  1. Supplementing their retirement income 
  2. Providing funds for long-term care or nursing home care while ensuring that there is a death benefit in place to protect their assets
  3. Personal or business opportunities, such as financial emergencies, children’s education funds, business start-ups, property purchases, to name but a few. 

What are the dividend options? 

Participating life insurance policyholders are qualified to receive annual dividends through a wide range of options. 

Paid in cash to reduce premiums

If you have elected to receive your dividends paid yearly in cash, they may be subject to taxation.

However, if you choose to use the dividend to reduce your premiums every year, all payable dividends will help to reduce the current year’s premium. And when the dividends are adequate to pay your entire required premium, you will receive the excess in cash. Dividends might be taxable. 

On deposit 

This option operates similarly to a savings account. The payable dividends are deposited with insurance providers and will earn an interest rate. You can access this cash and can withdraw money at any time. Interest on the dividends left on deposit can be taxable. 

Purchase Units in common stock segregated funds

This option is basically the same as the one above, but it is a bit riskier, and there is a greater chance to earn income on your contributions.

Paid Up Additions (PUAs)

Dividends are used to buy PUAs (additional permanent life insurance coverage). These are added to the basic policy and create another “layer” of permanent participating whole life insurance, eligible to earn dividends.

Purchasing PUAs is the opportunity to have more protection without further health checks, or new premium outlays. The dividends earned combined with those on your basic permanent coverage can lead to a considerable rise in the death benefit and cash value during your policy.

You can only withdraw the cash if you agree to surrender the PUAs.

Enhanced protection

This one-year term insurance is known as the Enhancement with a higher total death benefit than the basic policy. You can use the dividends to pay for the one-year term insurance annually to reach the amount of coverage chosen. The excess is used to purchase PUAs which automatically replace part of the one-year term insurance. Once PUAs have replaced all, you will reach the dividend conversion point, and all future dividends will purchase additional PUAs.

The bottom line 

Strong, flexible and built on a foundation of guarantees, participating dividend-paying whole life insurance policy gives you long-lasting protection and value you can access for cash.As long as you keep paying your premiums, this is a tremendously favorable policy on the market. Consider Participating Life Insurance as one of your prioritized options, and you will see it pay off in the long run. Contact Insurance Direct Canada for more information on which insurance companies offer this type of policy and get life insurance quotes as soon as possible!

Frequently Asked Questions

How much does Participating Life Insurance cost?

This type of insurance can be more expensive than traditional Term Life and Universal Life Insurance due to the policy’s guarantees. 
Several variables can determine how much your policy will cost, such as: 
Age: insurance, in general, is less expensive for policyholders at a younger age. 
Gender: insurance may cost less for women than men since women usually outlive their male counterparts on average.  
Profession: insurance prices are much higher for individuals with dangerous occupations. 
Health conditions: Family history, chronic diseases and lifestyle can increase insurance costs.

Are public or mutual insurance companies a better choice to buy Participating Life Insurance from?

Most insurance providers today are stock or public companies. This means they are owned by shareholders who have a say in how the companies do business. Nevertheless, there are still some companies with a second block of business called a participating account. This account benefits participating policyholders in this pool. Examples of public insurers providing participating life insurance policies are Sun Life and Canada Life. 
On the other hand, mutual insurance companies are owned by participating policyholders instead of shareholders. Hence, they are not pressured by shareholders for quarterly results, and the board of directors is elected unanimously. Some instances of mutual companies with participating life insurance are The Equitable Life Insurance Company of Canada and Assumption Life. 

Is it beneficial to purchase a participating whole life insurance policy when I am younger?

As we mentioned above, it is always an advantage to take out an insurance policy at a younger age. You will be able to pay less cost of insurance overall and grow your cash values over the years. Participating life insurance is designed to create your pool of capital and lend money to yourself by using your capital as collateral. This is analogous to you being your own banker, and the dividends from participating life insurance is among the best vehicles used to implement this strategy.

What are the key differences between a participating and non-participating life insurance policy?

The main difference is that non-participating whole life policies do not pay dividends to policyholders. The insurer decides the rates, death benefits, and cash surrender value at the time of purchase. 
Additionally, non-participating life insurance often has lower premiums compared to participating one. However, it has fewer benefits compared to participating whole life insurance, such as cash value growth, compound tax deferral, and no risk of loss in stock market volatility.

Where do the dividends come from?

Other than basic insurance protection, you can also receive yearly dividends. When you purchase your insurance policy, the premiums you have paid are deposited into a participating account and invested. The dividends are a portion of the surplus or excess cash from this account.
The participating account is affected by main factors: returns on investments, mortality, lapsed policies, expenditures and taxes. Dividends are calculated yearly by the insurance company, and the amount for distribution can vary based on the actual and expected experience.
In general, the dividend scale interest rate increases the longer you keep your policy and pay premiums. Even though there is no guarantee that the insurance provider will pay dividends, they have never failed to be credited to their policy owners over 172 years in Canada despite today’s low interest rate environment.

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