Participating versus Non Participating Whole Life Insurance

Participating vs Non-par Life Insurance

The world of whole life insurance is complicated, confusing and can be very intimidating for clients. Experienced advisors are invaluable when it comes to helping people determine the type of coverage best suited to their needs and goals.

Universal and whole life insurance each have their advantages and disadvantages, according to Trevor Parry, president of TRP Strategic Consulting and a partner at Parry McCone, a planning and strategy firm located in Toronto, ON. Parry says, “Identifying the product best suited to a particular client requires an assessment of the client’s individual needs and goals. Consider why the client is doing this.”

Sales of whole life have outpaced universal in the past few years. Between 2011 and 2014, premiums on new whole life policies in Canada increased from $361 million to $611 million. During the same period, premiums on new universal policies fell from $669 million to $406 million.

Parry believes this trend is directly related to interest rates. He says, “UL is certainly more interest-rate sensitive. We’ve seen the effect on premiums there.”

A volatile market also plays a role in driving investors towards the relative safety of whole life policies, whereas insured with a universal policy must make their own decisions as to where the cash portion of their policy will go. This increases the risk level of their investments.

1. Participating Whole Life Insurance

Participating whole life insurance policies require little input from the client. They offer the benefits of an investment plus whole life coverage, without being an investment expert. The investing is left to the professionals.

Participating insurance is the best solution for people wanting life insurance coverage with a tax-deferred investment, but don't want the responsibility of managing those investments.

These plans offer features similar to non-participating policies — lifetime protection, guaranteed cash values and, in most instances, guaranteed premiums. Plus, they also generate an annual dividend. The annual dividend allows the insured to share in the profitability of the insurance company. Dividend rates can fluctuate from year-to-year and there is no guarantee that the company will pay a dividend in a given year. However, most life insurance companies in Canada continue to pay dividends, even in today’s low interest rate environments.

The annual dividend can be used to accumulate additional cash values, buy additional life insurance, reduce future premiums, or allow the dividend to be used to purchase a one-year term insurance policy, which, in theory, is eventually offset by the increasing first base whole life coverage. Additional features include:

  • the potential for tax-deferred growth without the risk of loss associated with market volatility
  • lifetime protection
  • guaranteed premiums
  • cash values that are guaranteed and increase over time
  • accrued value is also tax-deferred
  • guaranteed, tax-free death benefits
  • potential dividends (not guaranteed), payout is based on the overall financial results of the Canadian Participating Fund

2. Non-Participating Whole Life Insurance

Non-Participating whole life insurance is like a “no-frills” permanent life insurance policy.

These plans offer more simplicity and a lower premium, but they do not generate an annual dividend. Non-participating whole life policies provide lifetime protection, fixed premiums guaranteed cash values and certain plans can be paid-up in a limited number of years.

One additional benefit of participating whole life insurance policies is that insurance companies that are also mutual companies who demutualize in the future to raise capital, would provide a demutualization benefit to policyholders. This windfall was seen several years back when Sun Life, Manulife and Canada life changed from mutual companies to publicly-owned companies. Additional features include:

  • the policyholder has no right to receive a portion of profits earned from investments the insurance company made with premiums
  • the policyholder pays the premiums and benefits are paid to the beneficiary upon death
  • the sum the beneficiary receives does not increase or decrease
  • premiums do not earn interest

For more details on non-participating or participating whole life insurance in Canada, please contact us at 1-866-899-4849 or visit our Whole Life Insurance Quote Page.

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