Participating life insurance policies have become an increasingly popular option among Canadians seeking whole life insurance that provides lifetime coverage plus investment components.

This article will explain everything you need to know about participating life insurance in Canada – how it works, who it’s best suited for, dividend payout options, cost comparisons, and more. We’ll dig into the critical details so you can decide whether this type of policy aligns with your needs.

What is Participating Life Insurance?

Participating life insurance is a form of whole life insurance that provides policyholders with a guaranteed death benefit plus the ability to earn dividends from the insurance provider’s profits.

With most life insurance policies, you pay your premiums, and the insurer pays out a death benefit to your beneficiaries when you pass away. However, participating policies allow you to share in the insurance company’s financial success.

How does it work in Canada?

Here’s how Participating life insurance works in Canada:

• A portion of your premiums are pooled with other participating policyholders’ premiums into a significant investment account managed by the insurer.
• The insurer invests these premiums in assets like bonds, stocks, and real estate.
• At the end of each year, the insurer calculates any profits earned above what is needed to pay expenses and claims. These excess earnings are known as “surplus profits.”
• The surplus profits are paid out to participating policyholders as dividends.

In addition to your guaranteed death benefit, you can earn annual dividends based on the insurer’s performance. These dividends can be taken as cash, used to purchase additional coverage, or applied to reducing your policy premiums.

While dividends are not guaranteed, they can provide substantial extra value from your policy if the insurer has a good year. Participating life insurance allows you to gain exposure to the insurer’s investments and your traditional policy benefits.

How much does participating life insurance cost in Canada?

Since participating policies provide investment components in addition to permanent life insurance coverage, they are more expensive than term life insurance or standard whole life insurance.

Participating life insurance premiums are fixed when you purchase the policy and remain the same throughout your lifetime. This guarantees your rate will never increase due to changes in health or age.

The higher premium accounts for:

• Lifetime policy payouts
• Investment management expenses
• Dividend payments
• Long-term risks the insurer must account for

While more expensive at the outset, dividends can potentially help offset some of these costs over the long run. But the risk is also shared with the policyholder – if the insurer hits hard times, dividends may be reduced or not paid at all.

Below is a comparison of estimated monthly premiums:

Policy Type	Sample Monthly Premium
Participating Whole Life	$150
Non-Participating Whole Life	$100
20 Year Term Life	$30

Participating policies may cost 2-5x more than term or standard permanent life insurance. This makes participating life insurance better suited to those with estate planning needs or using it as an income investment and retirement planning tool.

Participating Life Insurance Dividend Options

One of the great benefits of participating in life insurance is the ability to earn dividends from the provider’s surplus investment earnings. But how do you receive the dividends?

There are a few different options:

Purchase Paid-Up Additions

Paid-up additions allow you to use your dividends to purchase extra coverage added to your policy’s death benefit. This can be an excellent way to increase your total death benefit over time.

Pay Premiums

Many insurers allow dividends to directly reduce the annual premium you owe. For example, if your dividend was $500 and your premium was $1000 annually, you’d only need to pay the remaining $500 for that year.

Cash Accumulation

You can have your dividends deposited into an interest-earning account held by the insurer. This works similarly to a high-interest savings account. The insurer will set an annual interest rate, and you can withdraw the funds anytime.

Cash Payment

Opt to have the insurer send your dividend earnings directly to you as a payment by check or direct deposit. One downside is dividends may be taxed as income when paid in cash.

Choosing the right dividend option depends on your financial priorities. Paid-up additions create a more significant death benefit over time, while the cash accumulation approach may work well for saving up dividends to use later in life. Discuss the options with your insurer to select the best strategy aligned with your goals.

Participating vs. Non-Participating Life Insurance Policies

If you’re considering a participating life insurance policy, it helps to understand how it differs from traditional non-participating policies.

The core difference lies in the ownership structure. Participating policies are sold by mutual insurance companies, which are owned by policyholders who share in profits. Non-participating insurers are stock companies owned by shareholders.

Here is an overview of the key differences:

Participating	Non-Participating
Policyholders share in profits	No shared profits or dividends
Premiums are higher	Lower premium costs
Earn dividends from investments	No dividends earned
Dividends not guaranteed	Lower risk
Mutual company structure	Stock company structure

While participating policies cost more and carry some risk, they provide upside potential through dividend earnings. Non-participating options are cheaper and lower risk but do not offer dividends.

Determining which suits you better depends on your budget, risk tolerance, and whether you want to potentially benefit from the insurer’s investment returns. A non-participating policy may be the way to go for basic estate planning needs. A participating policy could be a great fit if you want lifetime coverage coupled with an investment component.

Who is Participating Life Insurance Right For?

Participating life insurance is best suited to specific demographics and financial situations. Below are examples of ideal candidates for participating policies:

• Middle-aged and older individuals – Older individuals can benefit from permanent coverage coupled with dividends to supplement retirement income.
• High net worth individuals – Wealthy individuals may use participating life insurance for estate planning and tax efficient inheritance strategies.
• Those wanting retirement income – The dividends can provide extra income in your golden years.
• Business owners – The death benefit protects the business while dividends supplement income.
• Young professionals with disposable income – The high premiums are affordable with a solid career income.

On the other hand, participating policies may not be the best choice for:

• Young individuals on tight budgets – The premiums can be too costly compared to term insurance.
• Very risk-averse individuals – Due to the dividends not being guaranteed.
• Those only needing temporary coverage – The premium and investment components provide more than just temporary death benefit coverage.

Talk to your financial advisor about whether participating in life insurance aligns with your overall financial situation. While not a fit for everyone, those who qualify can benefit substantially from participating policies in Canada.

How Life Insurance Companies calculate Dividends

You understand participating policies can pay dividends, but how exactly are those yearly dividends calculated?

It’s helpful to consider a few key factors that affect the dividend payout:

• Investment portfolio performance – The better the returns, the more surplus profits are available for dividends.
• Insurance claims – High claims reduce surplus funds for dividends.
• Operating expenses – Low expenses allow more surplus allocation to dividends.
• Number of policies – More participating policyholders means dividends are distributed across a larger pool.
• Government regulations – Regulatory minimums dictate the level of surplus required, impacting dividends.

In general, dividends reflect broader conditions within the company. Strong performance, prudent investing, efficient operations, and low claims add up to higher potential dividend payments.

Let’s consider a hypothetical example:

• Insurer XYZ’s investment portfolio earns a 7% return for the year.
• After paying claims and overhead expenses, $5 million remains as surplus earnings.
• With 50,000 participating policies, the $5 million surplus allows for a $100 dividend payment per policyholder.

So, the better the performance, the higher the dividend payout. Of course, this example assumes strong investment returns. During periods of weak market performance, dividends will decrease reflecting the poorer returns.

Pros and Cons of Participating Life Insurance

Participating life insurance policies have unique advantages along with some potential drawbacks to consider:

Pros of Participating Life Insurance

• Dividends provide extra value from the policy.
• Premiums remain fixed for life.
• Can generate retirement income from dividends.
• Death benefits can be increased via paid-up additions.
• Dividends grow tax-deferred.

Cons of Participating Life Insurance

• Dividends are not guaranteed annually.
• Participating policies have higher premiums.
• Policyholders share risk with the insurer.
• Dividends may be taxed when paid out as cash.
• Not ideal for younger buyers on tight budgets.

For many, the advantages of dividends, tax-deferred growth, and permanent lifetime coverage outweigh the higher premium costs and risk factors. However, participating policies are complex instruments that may not be suitable for all situations.

Consult an insurance advisor to assess if this type of policy aligns with your financial needs and risk tolerance.

Tax Implications of Participating Life Insurance Dividends

What happens if you take dividends as cash payments rather than reinvest them? Are they taxed like regular income?

In Canada, the tax rules for life insurance dividends ultimately depend on your specific province. But some general guidelines apply:

• Cash dividends may be taxable income when reported on your annual tax return.
• Dividends used for paid-up additions or premium payments are not taxed.
• Withdrawing accumulated cash value is generally tax-free up to your policy’s adjusted cost basis.

So while accumulations and death benefits remain tax-free, cash dividends run the risk of being taxed upon receipt. The exact tax rate depends on your province and tax bracket.

Many provinces do not require policyholders to report dividends as taxable income if they are left to accumulate within the policy. This allows tax-deferred growth comparable to investments in an RRSP or TFSA. Taxes are only paid if you cash out dividends or withdrawals above your cost basis.

Consult a tax professional to fully understand the tax implications specific to your situation. With sound tax planning, you can minimize taxes on participating policy dividends.

Is Participating Whole Life Insurance Worth It?

Whether or not participating life insurance is “worth it” depends on your financial situation and priorities:

Factors making it worth it:

• You want permanent lifetime coverage.
• You are in a high tax bracket.
• You need payments to supplement retirement income.
• You have maxed out registered savings plan contributions.
• Your estate will face significant taxes upon inheritance.

Reasons it may not be worth it:

• You have limited income to afford premiums.
• You only need temporary coverage for 20-30 years.
• You want to minimize complexity and risk.
• Your beneficiaries have minimal tax obligations.
• You already save sufficiently using TSFAs and RRSPs.

Participating life insurance provides substantial value for Canadians seeking permanent coverage and tax-deferred investment components. However, it involves more risk and cost than basic term policies.

Take the time to analyze your budget, risk factors, tax situation, and financial goals. This will determine if participating insurance and its dividends are likely to benefit your circumstances.

Key Takeaways on Participating Life Insurance in Canada

• Participating life insurance allows policyholders to earn dividends from the insurer’s profits.
• Dividends provide an extra return on premiums paid and enhance the policy’s value.
• Various options exist for receiving dividends, including cash payments, premium reductions, and purchasing additional coverage.
• Dividends are based on the insurer’s financial performance each year and are not guaranteed annually.
• Participating policies involve more cost and risk than non-participating permanent or term life insurance.
• These policies offer advantages for high-net-worth individuals, business owners, and those seeking tax-efficient income in retirement.
• Consult an advisor to assess if participating life insurance is an intelligent strategy for your specific financial situation.

FAQs of Participating Life Insurance

Article Sources

What is Participating Life Insurance? – dundaslife

What is a participating life insurance policy? – policyadvisor

Participating whole life: What it can and can’t accomplish – advisor.ca