How do Whole Life Insurance Dividends Work?

How do Whole Life Insurance Dividends Work?
phot by Lobster Stew

Whole life insurance, as the name implies, is insurance which provides coverage for the policyholder’s entire lifetime. Whole life policies can be divided into two categories: participating and non-participating. Both policies provide level premiums, lifetime protection and a guaranteed cash value—but participating whole life plans pay an annual dividend. The annual dividend is NOT guaranteed, and in most instances is linked to long-term interest rates as well as the insurance company’s performance. If you have an existing participating whole life policy which was purchased in a high interest environment, it is a good idea to request an updated policy illustration—the projected values may have changed dramatically.

Most participating whole life policies have multiple dividend options. The following is a brief look at some of the different dividend options:

Dividends on deposit – the annual dividend is kept on account within the policy

Paid-up additions – the annual dividend is used to purchase additional paid-up insurance

Premium reductions – the annual dividend is used to reduce the annual premium

Term option – the annual dividend is used to buy paid-up term insurance

By contrast, non-participating whole life policies have no dividends, and the value of these plans are guaranteed. Because non-participating whole life policies are fully guaranteed, they can be instantly compared by our on-line insurance calculator. Non-participating whole life policies can be payable for the life of the policy, or they can be paid up after a specific period of time (such as for 25 years, 20 years, 15 years or 10 years, or when the insured reaches age 65). The shorter the policy payment period, the higher the premium. The guaranteed cash surrender value of whole life policies vary by the amount of coverage, length of time paid, and the company issuing the coverage.

Below is an example (the rates and values are as of Feb 2008) comparing a participating and non-participating whole life policy, using a
30-year-old male non-smoker with $250,000 of whole life coverage paid up in 20 years:

Non-participating Empire Life Policy
Annual premium – $1,492.50
20-year contribution – $29,850
Death benefit at year 20 – $250,000
Death benefit at age 65 -$250,000
Cash value at year 20 – $31,750
Cash value at age 65 – $64,500

Participating Empire Life Policy (paid-up additions assumes the current dividend rate)
Annual premium – $6,672.50
20-year contribution – $133,450
Death benefit at year 20 – $680,776
Death benefit at age 65 – $1,273,845
Cash value at year 20 – $147,164
Cash value at age 65 – $513,881

Apply now for whole life insurance.

Posted by Chantal Marr.

Chantal Marr is a member of the Independent Financial Brokers of Canada.
Much of her success stems from her ability to listen to her clients' needs.
Read Chantal's background.

26 Comments

The Ins and Outs of Whole Life Insurance 04/15/2008 at 8:22 am

[...] Did you know that if you choose participating whole life insurance plan, the annual dividend is not guaranteed? Why should you request an updated policy illustration? What are the dividend options available? These are just some of the questions I tried to answer in the latest addition to our Life Insurance Tips section. You probably know that whole life insurance provides coverage for the policyholder’s entire life. If you want to learn more about this particular policy, read our article on The Ins and Outs of Whole Life Insurance. [...]
Adir 07/26/2008 at 5:52 pm

This article was a big help. Are the premiums on all Whole Life policies guaranteed?
Thanks,
AL
LSM Insurance 07/28/2008 at 7:47 pm

Al. Thanks for the comment. Gnerally speaking particpating and non partipating Whole Life policies have premiums which are fixed for the insured’s entire lifetime. Some insurance companies offer adjustable non particpating whole life premiums which are interest rate sensitive.
Cheryl 03/01/2010 at 10:41 pm

For the whole life insurance products featured, the annual premiums and thus death benefits are different. Is that a reflection of the type of product? Why would that be so?

If the person in this example died after 10 years of initiating the life insurance policy, would the death benefit still be e.g. $250,000?
LSM Insurance 03/02/2010 at 9:42 am

HI Cheryl,

Thanks for the note. On the non participating Whole Life policy the death benefit is level on the Participating Whole Life it increases each year depending on the insurance companies dividend scale.

Regards …
ROB 04/05/2010 at 2:19 pm

HI,

“Paid-up additions – the annual dividend is used to purchase additional paid-up insurance”

at what mortality table does the dividend purchase additional insurance..

if i am 40 preferred health when i first buy insurance..

how would my dividends buy insurance when i am 46,47,48 etc..would the insurance company want to have my health profile every year..or is it a one size fits all…

2) if dividens buy paid up insurance..does it mean single premium insurances are available..
LSM Insurance 04/05/2010 at 3:17 pm

Hi Rob,

Thanks for the note. Whole Life paid up additions if set at the time of application are not subject to medical requirements each year – however if you change the dividend option mid way through the policy the insurance company would require medical evidence.

Paid up additions and single premium policies are two completely different topics.
Kimberly 04/29/2010 at 11:25 pm

Why not try Equitable Life of Canada, they are a Mutual Life Company (Canadian)their Participating Account Yield is second to none. Premiums, cash values and death benefit are guaranteed. It is the only “true” Participating Whole Life Plan in the Canadian Marketplace as it is one of the last remaining Mutual Life Insurance Companies – policyholders are the shareholders, benefits from performance of all lines of business not just the participating account.

Increasing face amounts (death benefit) with paid up additions or one year term is not subject to additional medical requirements, if you elect a guaranteed insurability option, you are locking in the option to purchase additional insurance in the future without evidence. That is why insuring children makes so much sense they are healthy and time value of money, start them young!
LSM Insurance 04/30/2010 at 8:31 am

Hi KImberly,

Thanks for your note – I agree Equitable Life has a very good Participating Whole Life plan. One addition to your comment Assumption Life is also a mutual company and just introduced a participating Whole Life plan.
corey 12/08/2010 at 12:54 am

my wife is 39 and i am 36. we ave 4 kids ages 17,15,9,&8. no smokers in the home and we both are healthy. what is the best policy out there for us today.
LSM Insurance 12/08/2010 at 8:38 am

Hi Corey,

Thanks for the note. The best plan will depend on the amount of insurance you need, your budget and if you need the coverage for a specific Term or for life.

Regards,
laura 03/02/2011 at 11:15 pm

Hi
My hubby is 58years old, myself also, we like to get insurance so we can leave a bit of money to our children when we die, we have no mayor health isues and we don’t smoke, we heard of so many insurances and don’t know the best one for us that doesn’t cost us too much, what do you recommend?
Thank You
LSM Insurance 03/03/2011 at 9:46 am

Thanks Laura. We will send you email now – we’re happy to help navigate you through things.

Jorge J Bravo 11 MD 07/28/2011 at 10:03 am

What to do with the dividends? I have several policies where the guaranteed 4% cash value increase alone will offset the annual premium, not counting on any dividends. Will I create more wealth by continuing to pay premium and build up cash value or take those premium dollars and in invest elsewhere, eg, dividend growth stocks?
LSM Insurance 07/28/2011 at 10:23 am

Thanks Jorge – its hard to say – depends on risk level / return of those grwoth stocks. One point to consider if you choose a dviidend paid up addition option. The insurance death benefit grows tax free and is paid out tax free.
Laura 08/02/2011 at 8:48 pm

My husband and I have a policy right now that is a term 10 policy and will be done in a couple years from now. He’s 47 and I’m 41. Not any major major heath issues, and non smokers. Would you suggest that we go with another term insurance, and if not what would be some of our other options?
LSM Insurance 08/03/2011 at 3:52 am

Thanks for the note Laura. It’s hard to say which plan would be best for you and your husband without knowing your needs and goals. Term plans have lower initial premiums but the cost increases as you get older. Permanent plans have higher initial premiums but the cost is level for life.

We will send you a separate email now.
Donna 09/22/2011 at 2:30 pm

My husband and I have purchased whole life insurance some 20 years ago when we started our family. We only have 1 child who is now 19. Would it be wise to cash in on some of the dividends now to pay down some debt (i.e mortgage) or even borrow from the insurance policies ($100,000 and $150,000 respectively).
LSM Insurance 09/22/2011 at 2:41 pm

Thanks for the note – its hard to say without seeing the policy. One thing you should verify is if there are any tax consequences to doing this. The insurance carrier can provide this to you in advance of any withdraw.
Melissa 01/22/2012 at 6:42 pm

Hello. My husband (28) and myself (29) purchased whole life insurance policy in July 2011. We have 3 children under the age of 8 years old. Our monthly payments are a little high but I’m wondering to help with our budget, should we cancel and go with term for the lower payments?
LSM Insurance 01/22/2012 at 10:08 pm

Thanks for the note.

It’s hard to say without doing a needs analysis. The attached calculatot may be helpful link to lsminsurance.ca

You may want to see if you can decrease your existing Whole Life coverage and reduce your premiums by enough to add the necessary Term coverage and still stay within your budget.
Joe 03/10/2012 at 12:12 pm

If I I have a $100,000 whole life policy with Met Life.It has additional paid up insurance of $13,000.
If I stop making payments monthly of $55.00 ( my premium)
Will the additional amount of $13,000 be used to pay the premiums?
LSM Insurance 03/10/2012 at 12:59 pm

Your paid up additions would have a cash value which you could use to offset future premiums. But the cash value of the paid up additions is less than the death benefit value. Your agent/broker or the insurance company should be able to give you a breakdown.
Mitch 08/03/2012 at 10:22 pm

Hello,
I’m would like to know if getting participating life insurance could almost be a replacement to RRSP.

Using your above example-cash value at Age 65 is pretty high (and even higher for Participating Life Insurance)

Could this be an option instead of contributing more to RRSPs? Which would give better rate of returns? it seems to me like Par Insurance would?

Thanks for help.
LSM Insurance 08/04/2012 at 11:12 am

You’re welcome.

Keep in mind the premiums and cash values in the example given are as of Feb 2008. Premiums have since increased with most carriers and dividends have lowered with the reduction in long term interest rates.

The remaining Whole Life suppliers still offer a good value in most instances. But you can not be compared to an RRSP because 1) an RRSP offers a tax deductions to the contributor and 2) Most importantly an RRSP has no insurance component so it is very difficult to make an apple to apple comparison.
Anup56 04/03/2013 at 6:07 pm

Hi Mitch,
You are correct in assuming the benefits of whole life appear to create a major cash reserve over the years and uninterrupted compounding vs an RRSP which will be affected by market down turns. And to Donna, yes you can borrow from your insurance and buy whatever you like, but remember to pay yourself back to the plan (as if you were paying a bank for financing) so that payments will continue to grow your policy via dividends and profits from the mutual insurance company, the most important thing is you must use a Mutual Life Insurance company that has Partipating Divdend Paying Whole Life with paid up Additional rider.
Remember you have taxes at the end in RRSP’s and you have fees in the mutual funds that affect returns. The fees in Whole life are only at the beginning to fund your account. Then you have a never ending bank account to borrow from up to your policy limits. Just thought I’d throw in my 2 cents.
Just remember always balance your holdins, RRSP can be a % of your holdings, but Participating Dividend Paying Whole Life can be a % as well , and a whole new way to finance all your needs without ever talking to your banker and you getting richer without worrying about market turmoil.

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How do Whole Life Insurance Dividends Work?

How do Whole Life Insurance Dividends Work? phot by Lobster Stew

Apply now for whole life insurance.

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How do Whole Life Insurance Dividends Work?
phot by Lobster Stew