Whole Life Insurance can be broken down into two categories: participating and non-participating.
Non-participating whole life policies generally offer guaranteed premiums, guaranteed cash value, and guaranteed coverage. Non-participating whole life policies, on the other hand, do not generate a dividend.
Participating whole life policies do generate a dividend, but the dividends are not guaranteed. Both policies are under pressure by low interest rates, but in different ways.
The profitability of non-participating policies is being squeezed, and companies are responding by hiking premium rates. Many carriers have raised rates by as much as 30 per cent over the last three years, or have pulled the products from their offering all together. One example is Empire Life, which has removed its popular 20-Pay Solution product from its shelf.
Participating whole life plans are also getting squeezed when it comes to the guaranteed aspect of the product, as well as the non-guaranteed dividend component. Canada Life, one of the leading providers of participating whole life insurance in Canada, was still able to maintain a very competitive 6.5 per cent dividend rate in 2013, despite decreasing from 6.96 per cent.
Given today’s historically low interest rates (the average Bank of Canada interest rate for the month of April 3013 was 1.25 per cent), participating whole life insurance policies still seem like a great deal.
But the question becomes, how long can dividend rates remain at these levels? The reality of maturing long-term bonds suggests not very long.
Participating whole life providers generally invest in very conservative assets, with long-term corporate bonds providing a big chunk of those investments. Twenty-five year bonds maturing at 10 per cent are now being renewed at 2 per cent. As the percentage of holding at lower interest rates continues to increase, dividend rates will be forced to decrease.
